Question

If I have a project where my pre-tax flow is $ 3,000 for year 3, how much would my pre-tax flow be inflated if I consider that an inflation forecast of 5% has been generated for year 1, of 2% for year 2, 7% for year 3 and 3% for year 4?

Answer 1

Pre tax Cash flow = $3000

Inflation adjusted cash flow = Pretax Cash Flow * ( 1 + Inflation rate)

Cash Flow for year 1 = Cash Flow for Year 0 * ( 1 + Inflation Rate)

= 3000 * ( 1 + 5%)^ 1

= 3000 * 1.05

= $3150

Cash flow for Years 2 = Cash Flow for Year 1 * ( 1 + Inflation Rate)

= 3150 * ( 1 + 2%)

= $3213

Cash Flow for Years 3 = Cash Flow for Year 2 * ( 1 + Inflation Rate)

= 3213 * ( 1 +7%)

= 3437.91

Cash Flow for Years 4 = Cash Flow for Year 3 * ( 1 + Inflation Rate)

= 3437.91 * (1 + 3%)

= 3541.047

So, The Inflated value of $3000 upto 3 year is 3437.91 and upto 4th year is 3541.047.