Exercise / Step 4.5 / Capacity project – Inflation
Learn how to understand the influence of inflation on capacity investment.
Again, for a matter of simplicity, we go back to step 4.1, the base case.
I only added inflation rates for selling prices and costs.
Your task consists in incorporating inflation in the calculation of sales and costs.
Line 31 is the sales figure which simply is the number of units (stable) multiplied by the unit selling price (divided by 1,000 to give figures in k$). So far, no inflation has been introduced in the sales figure. But, you anticipate that selling price might increase by 2% per year. Then, you are going to complement the formula in each cell by inflation: the selling price will no longer be F22, but F22 multiplied by (1 + 2%)N, where N is 1…8. In the spreadsheet, the formula is ((1+H26)^C29) (then D29, etc.). Take care and don’t forget the ‘$’ to fix the column if you copy on the right.
Do the same for operating costs (Opex) and you get the new NPV and IRR.
