INFLATION INFLUENCE ABOUT INVESTMENT DECISION

Transcription

1 INFLATION INFLUENCE ABOUT INVESTMENT DECISION Assocae Professor PhD Dorel Berceanu, Assocae Professor PhD Anca Băndo, Unversy of Craova ABSTRACT: In hs arcle, we are dealng wh an ssue very mporan as regards he nvesmen decson, namely he nfluence ha has on nflaon. Thus, n a bref nroducon spolghed how we have perceved nflaon oday, wha means and how manfess self. An ample space n he paper s dedcaed manner of deermnng he ne presen value n he presence of nflaon, wh an emphass on he lnk beween he real neres rae, he nomnal neres rae and he nflaon rae. To be convncng n our approach we nroduced n he las par of he paper a case sudy n whch we showed how affecs nflaon on nvesmen decsons, n praccal way. Keywords: nvesmen, decson, nflaon, cash flow JEL Codes: G 31 Inroducon The acvy of nvesmen n a company s based sraegy of economc developmen se a he level held and based nvesmen programs or projecs. The nvesmen, regardless of whch wll be developed whn a company, he deals n order o mplemen hem n more nvesmen projecs. The projec nvesmen s defned as a complee and auonomous acon nvolvng he achevemen of s nvesmen and exploaon of s long lfe. Therefore, he esablshmen and use of fxed asses represen he mplcaons of ha producon on he company, one of he basc elemens of he fnancal mechansm of. An essenal facor of polcy connuy and growh of busness nvesmen company s conrbung o he consrucon or purchase of asses of producon and markeng. Realzaon of nvesmens requres sgnfcan fundng needs, leadng o mparmen of long-erm. Therefore, he effcency of nvesmen projecs should be compared wh he yeld on he nvesmen capal. Gven he rsk embedded, he decson of nvesmen s a be on he fuure of he company. Invesmen decson s a very dffcul for leaders of all frms. By s very naure, he decson affecs he nvesmen a company a long me horzon, f no forever. In he dea of adopng a nvesmen decson we can use smple crera or crera based on dscounng. Of he laer caegory, ne presen value creron (NPV) s mos ofen used, snce he objecve answer o maxmze he value of he company called by heory of modern fnance. Resuls from he applcaon of ne presen value creron are, however, dfferen dependng on he acon or no nflaon. Inflaon s a real fac of oday whch can no be gnored. Even he mos developed saes have an nflaon of several percen, whch, as clams Keynes, s somemes benefcal for he economy, as he "ol" o "whewash" he mechansms and promoe economc growh. In an economy wh a growh dynamc changes akng place n prces consanly. Organzed markes for secures and oher goods are normal for prces o change from one ransacon o anoher. Somemes, he prce of a good or servce may be a rend upwards or downwards for a perod of monhs or years. However, ha prce changes are he resul of he change reques or offer for goods and servces does no mply, necessarly, some change n he general level of prces. Increasng he prce of goods or servces may be offse by he decrease of ohers, so ha he average prce may 320

2 reman more or less consan. A change n he average level of prces s f here s a sleg endency for more prces o move up or down. I can hus apprecae ha nflaon represens he acceleraed growh, and he general level of prces, mached by ncreased money, low purchasng power of money and deprecaon under he nfluence of economc, moneary, socal, domesc and foregn polces. Alhough he dea of a medum level of prce s a useful ool, s mporan o be aware of s lms. Sascans o buld prce ndex mus decde wha goods are ncluded n he ndex and he share allocaed o each. An ndex used frequenly, he consumer prce ndex. However, mos companes have revenue and expendure whose componens are no closely relaed o he average prce of consumer goods. In hese crcumsances, careful consderaon prces of goods and servces become crcal when s necessary o a decson. In capal budgeng, a manager mus ake no accoun no only he possble effecs of nflaon bu also he effec of long-erm rends n he prces of s producs and oher major expenses. Ths s very mporan because he prces of mos of he goods and servces purchased by he company are no drecly ncluded n he prce ndces used currenly. The deermnaon of he ne presen value akng no accoun he effecs of nflaon In esmang of cash flows, s mporan ha companes ake no accoun he ancpaed nflaon. Ofen, here s a endency o assume ha prce levels reman unchanged over he lfe of he projec. Frequenly, hs s done n gnorance, he smplsc, cash flows can be esmaed on he bass of exsng prces. The analyss of nvesmen projecs nvolvng a leas wo dsnc seps: frs, coss and revenues mus be descrbed n he same way; second, he coss and revenues mus be assessed akng no accoun he goals and objecves decson. In each of hese seps, decson has o choose beween usng eher nomnal cash flows or real cash flows. Even f capal budgeng can be made usng eher real cash flows or real cash flows, les n our ably o esmae he necessary npus, he coss and benefs of he nvesmen projec. If coss and revenues are slegly nfluenced by he marke whle he coss are made or produced revenue esmaes n real erms may be more accurae han esmaes n nomnal erms. If, however, he coss and revenues are based on conracual relaonshps ha nclude a fxed prce long-erm forecass n nomnal erms can be more precse. To conver he nomnal values n real, nomnal values for a gven perod are dvded by he prce ndces of ha perod. Pon ou ha a relave prce ndex s he rao beween he wo prce ndces. The value of he numeraor s he prce ndex for he year of cash flows. The denomnaor s he ndex prce of he base. Hence, cash flows for a projec can be descrbed n real erms or n nomnal erms. The value of he asse wll no be affeced f s analyzed n real erms or n nomnal erms as long as s used o dscoun a rae approprae n each case. Thus, wh nomnal cash flows we wll use nomnal rae and wh real cash flows we wll used he real rae. Volang hs rule, apparenly smple, s a frequen source of errors n assessng he projec. The lnk beween he real neres rae, he nomnal neres rae and nflaon rae s deermned by he relaonshp of Fsher: or: Rr Rn R = (1) 1 R 321

3 Rn = R Rr (1 R ) (2) where: Rr = real neres rae; Rn = nomnal neres rae; R = annual rae of nflaon. Whou ax, nomnal rae of dscounng wll reflec expeced fuure rae of nflaon, so ha changes n expeced nflaon does no change he expeced real rae of neres. In general, nvesors are axed wll lower ncome afer ax, compared wh hose who are no axed. However, here s neracon beween he effecs of nflaon and axaon. Thus, assume ha an nvesor wans o consder an nvesmen projec hrough he NPV and wonders wha mos suggesve dscouned rae s. Consderng he nomnal neres rae Rn, f he nvesor s exemp from ax, real rae of neres can be obaned by applyng he relaonshp (1). The suggesve nomnal ncome for an nvesor s axed a hgher nomnal dsposable ncome afer ax. An nvesor axed wll acheve an ncome a a nomnal rae Rn(1 T), where T s he rae of ncome ax. The suggesve real ncome afer ax depends on he rae of ncome ax. Noe Rr(T) o emphasze ha s value depends on T. The real rae afer ax wll be: Rn (1 T) R Rr(T) = (3) 1 R In he absence of nflaon, R = 0 and hus: Rr(T) = Rn (1 T) (4) We beleve ha he nvesor has he opporuny o nves n asses whou rsk, exemp from ax a a rae Re. If Re s greaer han Rn(1 T), when Re s he opporuny cos of funds acually nvesed, and we have: Re R Rr(T) = () 1 R In general, for an nvesor who expecs a rae of annual nflaon R and a rae ax T, he acual neres rae afer ax s: Max(Rn R Rn T; Re R) Rr(T) = (6) 1 R I noes ha here are exreme case n whch a posve rae of nflaon, he acual rae axaon of an nvesor axed o become negave, even f he nomnal rae before ax s posve. Equaons above are used o esmae he real effecve rae of neres for an nvesor gven he rae of ncome ax, he nomnal neres rae and expeced rae of nflaon. I s noed ha real neres raes vary dependng on he rae of ncome ax. I s also very useful o be able o do a projecon of how ha changes he acual neres raes f he nflaon rae changes. So, n he presence of expeced nflaon, he nomnal neres rae can be hough as havng wo componens: a real and an adjusmen for nflaon. Snce he nvesmen decson s based on ancpaed fuure cash flows, ancpaed rae of nflaon wll be refleced n he expeced profably of he projec or he cos relaed o capal projec. 322

4 Marke daa used n esmang he curren cos of capal wll nclude a premum for ancpaed nflaon. Bu as long as he marke nclude an adjusmen for nflaon n dscouned facor, cash flow s esmaed by he company used n he analyss of he capal budge may no nclude an elemen o reflec fuure nflaon. Gven ha he cos of capal already ncludes ancpaed nflaon, decson may be used o correc n relaon o nflaon: be addng an nflaon esmaed a cash-flows n numeraor; numeraor s he expresson whou he ncluson of an adjusmen for nflaon and move a nflaonary facor from he marke rae n he denomnaor. I s more naural o use he marke nformaons and, explcly, o ncorporae esmaes of he nflaon rae ancpaed n he cash-flows o he numeraor. Bu on he oher hand, he problem s dffcul o esmae he ancpaed rae of nflaon. Demonsraed ha as long as nflaonary facors are aken no accoun boh he numeraor and denomnaor o he same exen, he effec s null. Thus, when nflaon s ancpaed duly refleced boh he esmaes of cash flow from he numeraor and he expeced profably (requred) ncome from he marke n he denomnaor, he resulng ne presen value wll be calculaed boh n real erms as and nomnal, resulng n ne presen value of he resulng esmae wll be ndependen of nflaon. However, he ancpaed effec of nflaon on he expeced rae of ncome may be dfferen han he esmaed cash flows. Indeed, ne cash-flow componens - he cash nflow and cash ouflow - may be affeced n varyng degrees by he ancpaed nflaon. The effec of nflaon on ancpaed cash nflow and he cash ouflow desgn wll be dfferen dependng on he naure of he projec. In some cases, cash nflows, he hrough prce ncreases wll ncrease faser han cash ouflows; n oher cases, wll happen exacly he oppose. No maer, bu how hey are nfluenced by nflaon, he wo componens of he cash flow, bu s mporan ha be ncluded n esmaes of cash flows desgn. The naure of hs case more complex s refleced by he followng equaon: [ IF (1 R ) OF (1 R ) ] 0 NPV I (7) = n wh nf laon = 1 (1 a) 323 (1 T) A T where: IF = cash nflow a he "" momen; OF = cash ouflow a he "" momen; R = nflaon rae of cash nflows; R o = nflaon rae of cash ouflows; Rgh parenhess represens gross operang surplus, he dfference beween operang ncome and operang expenses whou deprecaon. I s also noeworhy ha deprecaon can be consan n nomnal sum, bu he ax savngs from deprecaon may decrease n real erms. In general, f we do no ake no accoun he effecs of nflaon can make an wrong analyss of capal budgeng s clear ha he resuls are more accurae by akng no accoun he effecs of nflaon. Inflaon nfluence abou nvesmen decson n pracce To argue he pracce oulned above, consder he followng for an nvesmen projec: I = 100,000 le; ancpaed cash nflows: 3,000 le; ancpaed cash ouflows: 20,000 le; R = 6%; R o = 7%, Rr = 9%, n = an; T: a) 16% b) 2% c) 0%. The ssue of deermnng NPV n he absence and presence of nflaon. Accordng o Fsher's relaonshp:

5 Rn = R Rr(1R) Rn = 0,06 0,09(1 0,06) = 0,14 = 1,4% a) T = 16% b) In able 1 are expeced cash-flows whou he nflaon rae for a ax rae of 16%. Table no.1 Expeced ne cash flows whou nflaon (T=16%) Indcaors (le) Year 1 Year 2 Year 3 Year 4 Year Ancpaed cash nflows Ancpaed cash ouflows Gross operang surplus Income ax Ne operang surplus Tax savngs from deprecaon (T A) Ancpaed ne cash flows Deprecaon (A ) = = le, = 1, NPV = = , = , = , 2le whou nf laon = 1(1 0,09) > 0 and he projec s acceped. In able 2 he esmaes of ancpaed ne cash flows nclude he effecs of nflaon. Cash nflows are subjec o an nflaon rae of 6%, whle cash ouflows are subjec o an nflaon rae of 7%. Table no.2 Expeced ne cash flows akng no accoun he effecs of nflaon (T = 16%) Indcaors (le) Year 1 Year 2 Year 3 Year 4 Year Ancpaed cash nflows Ancpaed cash ouflows Gross operang surplus Income ax.64,80.864, , , ,16 Ne operang surplus 29.21, , , , ,84 Tax savngs from deprecaon (T A) Ancpaed ne cash flows 32.41, , , , ,84 The expeced rae of ncome, whch s also he dscouned rae s 1.4%, deermned earler, reflecng an nflaon rae of 6%. NPV calculaon s he followng: 324

6 NPV 32.41, , , , ,84 wh nf laon = = ,14 (1 0,14) (1 0,14) (1 0,14) (1 0,14) = 32.41,20 0, ,2 0, ,32 0, ,64 0, ,84 0, = , , , , , = = , = ,787 le So, NPV > 0 and he projec s acceped. wh nf laon I noes, however, ha under he nfluence of nflaon, NPV s lower han n he absence hereof. b) T = 2% In Table 3. are expeced cash-flows whou he nflaon rae for a ax rae of 2 %. Table no.3 Expeced ne cash flows whou nflaon (T=2%) Indcaors (le) Year 1 Year 2 Year 3 Year 4 Year Ancpaed cash nflows Ancpaed cash ouflows Gross operang surplus Income ax Ne operang surplus Tax savngs from deprecaon (T A) Ancpaed ne cash flows Deprecaon (A ) = = le, = 1, NPV = = , = , = 1.718, nf laon = 1(1 0,09) 0 and he projec s acceped. whou In Table 4, he esmaes of ancpaed ne cash flows nclude he effecs of nflaon. Cash nflows are subjec o an nflaon rae of 6%, whle cash ouflows are subjec o an nflaon rae of 7%. Table no. 4 Expeced ne cash flows akng no accoun he effecs of nflaon (T=2%) Indcaors (le) Year 1 Year 2 Year 3 Year 4 Year Ancpaed cash nflows Ancpaed cash ouflows Gross operang surplus Income ax Ne operang surplus Tax savngs from deprecaon (T A) Ancpaed ne cash flows le>

7 The expeced rae of ncome, whch s also he dscouned rae s 1.4%, deermned earler, reflecng an nflaon rae of 6%. NPV calculaon s he followng: NPV wh nf laon = = ,14 (1 0,14) (1 0,14) (1 0,14) (1 0,14) = , , , , , 484 = = = = le So, NPV > 0 and he projec s acceped. c) T=0% wh nf laon Furhermore, he analyss wll be carred ou sarng from he same dae, he only dsncon beng he rae of ncome ax of 0%. Table no. Expeced ne cash flows whou nflaon (T=0%) Year 1 Year 2 Year 3 Year 4 Year Ancpaed cash nflows Ancpaed cash ouflows Gross operang surplus Income ax Ne operang surplus Tax savngs from deprecaon (T A) Ancpaed ne cash flows Deprecaon (A ) = = le, = 1, NPVwhou nf laon = = , = = 1(1 0,09) = 3.077le>0 and he projec s acceped. In Table 6, he esmaes of ancpaed ne cash flows nclude he effecs of nflaon. Table no. 6 Expeced ne cash flows akng no accoun he effecs of nflaon (T=0%) Indcaors (le) Year 1 Year 2 Year 3 Year 4 Year Ancpaed cash nflows Ancpaed cash ouflows Gross operang surplus Income ax Ne operang surplus Tax savngs from deprecaon (T A) Ancpaed ne cash flows NPV calculaon s he followng: 326

8 NPV wh nf laon = = ,14 (1 0,14) (1 0,14) (1 0,14) (1 0,14) , , , , , = = = le So NPV wh nf laon <0 and he projec wll be rejeced. In hs example, he forces of nflaon on cash ou-flows was hgher han on cash nflows. Conclusons Of hose lsed above, we noced ha f we do no ake no accoun he effecs of nflaon can do an wrong analyss of capal budgeng. The projec was suppored when n realy has a rae of reurn below he cos of capal, caused by unequal mpac of nflaon on cash nflows and cash ou flows. As a consequence, n our example, he NPV projec was negave (for T = 0%). Bu hs s no a general rule, ha s makng he necessary adjusmens due o nflaon s no always necessarly n a negave NPV projec (see ables 1, 2.3 and no.4). Clearly, he resuls are more accurae by akng no accoun he effecs of nflaon. References: 1. Arnold, G., (2008), Corporae fnancal managemen, Fourh Edon, Prence Hall Publshng House, London, England 2. Berceanu, D., (2006), The fnancal decsons of he frm, Second Edon, Unversara Publshng House, Craova 3. Brealey, R., Myers, S., Marcus A., (2007), Fundamenals of corporae fnance, Ffh Edon, McGraw Hll Publshng House, New York, Uned Saes of Amerca 4. Brgham, E., Daves, P., (2004), Inermedae fnancal managemen, Eghh Edon, Thomson Souh Wesern Publshng House, New York, Uned Saes of Amerca. Ross, S., Weserfeld, R., Jafee, J., Jordan, Bradford, (2008), Modern fnancal managemen, Eghh Edon, McGraw Hll Publshng House, New York, Uned Saes of Amerca 327