Investments. Taking inflation into account when making investment decisions (most important)

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Investments. Taking inflation into account when making investment decisions (most important)

Lecture notes, cheat sheets

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CONSIDERING INFLATION IN INVESTMENT DECISIONS

Inflation affects the value of the effectiveness of an investment decision, the conditions of financial feasibility, the need for financing and the effectiveness of participation in a project of equity capital. This impact is noticeable for projects with a temporary investment cycle (in the extractive industry), or (and) requiring a significant share of borrowed funds, or (and) implemented with the simultaneous use of several currencies (multi-currency projects). Inflation should be taken into account when examining the effect of uncertainty and risk on the feasibility and effectiveness of projects.

Accounting for inflation is carried out using:

▪ general index of ruble domestic inflation, determined taking into account the adjusted working forecast of the course of inflation;

▪ forecasts of the ruble exchange rate;

▪ forecasts of external inflation;

▪ forecasts of changes over time in prices for products and resources (gas, oil, energy resources, equipment, etc.), forecasts of changes in the level of average wages and other aggregated indicators for the future;

▪ forecast of tax rates, duties, refinancing rates of the Central Bank of the Russian Federation, etc., financial standards of state regulation.

Inflation affects:

▪ on price indicators;

▪ for financial need;

▪ for the need for working capital.

Inflation Forecast Procedure

First you need to determine which category of inflation the project belongs to:

▪ if measures have been taken to reduce the impact of inflation on the need for financing, then for projects of the second category the minimum possible level of inflation should be used (for example, calculate in current prices). For projects of the first category, the maximum one should be chosen from all reasonable inflation forecasts;

▪ if such measures are not taken, then, along with the described maximum inflation forecasts, it is necessary to consider scenarios associated with the fastest (of those actually predicted) reduction in inflation from the accepted maximum to the accepted minimum value;

▪ estimate the lower limit of possible changes in one of the characteristics of changes in the exchange rate (for example, chain indices of internal inflation of foreign currency), including from considerations of the ratio of dollar prices for products: according to the project and existing ones (within the country and abroad).

In addition, the financial feasibility and effectiveness of the project should be tested at various levels of inflation as part of an assessment of the sensitivity of the project to changes in external conditions.

When forecasting inflation, one should take into account official data, as well as expert and other estimates that take into account the GNP deflator, and (or) price indices for a fairly large "basket" of permanent composition.

Author: Kuznetsova S.A.

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