Inflation and project evaluation: a case study of the effect of price changes on rate of return

Abstract

Inflation is one important economic variable which is playing an ever-expanding role in the decision making process of business, industry and government. The evaluation of capital expenditure projects are based on estimation of future economic benefits from such expenditure, and if such benefits are susceptible to changing prices, it becomes necessary to measure such effects. The major thrust of this study is that the discounted cash flow rate of return measure used in making capital investment is sensitive to prive-level changes. Several factors constitute the determinants of the resulting effects of price-level changes on rate of return.