Valuation in an Inflationary Environment

65 Pages Posted: 8 Oct 2002

See all articles by Ignacio Velez-Pareja

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Joseph Tham

Duke University - Duke Center for International Development in the Sanford School of Public Policy; Academy of Public Administration under the President of the Republic of Kazakhstan

Date Written: May 31, 2002

Abstract

Using illustrative examples, this paper shows that the Net Present Value for project evaluation should be based on estimates of free cash flows at nominal prices. It is a widespread practice to evaluate projects at constant or real prices. These days, the use of constant or real prices is an unnecessary oversimplification. In particular, we present an example where the results from the constant and real price methodologies are biased upwards and there is a risk that in practice, bad projects will be accepted as good projects.

Keywords: Project evaluation, engineering economy, NPV, Net Present Value, inflation, constant price methodology, current price methodology, nominal price methodology, free cash flows, pro-forma financial statements, relative prices

JEL Classification: D92, E22, E31, G31

Suggested Citation

Velez-Pareja, Ignacio and Tham, Joseph, Valuation in an Inflationary Environment (May 31, 2002). Available at SSRN: https://ssrn.com/abstract=329020 or http://dx.doi.org/10.2139/ssrn.329020

Ignacio Velez-Pareja (Contact Author)

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

Joseph Tham

Duke University - Duke Center for International Development in the Sanford School of Public Policy ( email )

Box 90312
302, Towerview Dr, Rubenstein Hall, Room 272
Durham, NC 27708
United States
919-613-9234 (Phone)
919-681-0831 (Fax)

HOME PAGE: http://fds.duke.edu/db/Sanford/faculty/thamjx

Academy of Public Administration under the President of the Republic of Kazakhstan ( email )

Abay Street, 33a
Astana
Kazakhstan
+7 8 7172753422 (Phone)

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