Inflation Investment

Topics: Inflation, Net present value, Nominal interest rate Pages: 11 (3578 words) Published: February 21, 2013
Associate Professor PhD Dorel Berceanu, Associate Professor PhD Anca Băndoi, University of Craiova ABSTRACT: In this article, we are dealing with an issue very important as regards the investment decision, namely the influence that it has on inflation. Thus, in a brief introduction spotlighted how we have perceived inflation today, what it means and how it manifests itself. An ample space in the paper is dedicated manner of determining the net present value in the presence of inflation, with an emphasis on the link between the real interest rate, the nominal interest rate and the inflation rate. To be convincing in our approach we introduced in the last part of the paper a case study in which we showed how affects inflation on investment decisions, in practical way. Keywords: investment, decision, inflation, cash flow JEL Codes: G 31

Introduction The activity of investment in a company is based strategy of economic development set at the level it held and based investment programs or projects. The investment, regardless of which will be developed within a company, the details in order to implement them in more investment projects. The project investment is defined as a complete and autonomous action involving the achievement of its investment and exploitation of its long life. Therefore, the establishment and use of fixed assets represent the implications of that production on the company, one of the basic elements of the financial mechanism of it. An essential factor of policy continuity and growth of business investment company is contributing to the construction or purchase of assets of production and marketing. Realization of investments requires significant funding needs, leading to impairment of long-term. Therefore, the efficiency of investment projects should be compared with the yield on the investment capital. Given the risk embedded, the decision of investment is a bet on the future of the company. Investment decision is a very difficult for leaders of all firms. By its very nature, the decision affects the investment a company a long time horizon, if not forever. In the idea of adopting a investment decision we can use simple criteria or criteria based on discounting. Of the latter category, net present value criterion (NPV) is most often used, since the objective answer to maximize the value of the company called by theory of modern finance. Results from the application of net present value criterion are, however, different depending on the action or not inflation. Inflation is a real fact of today which can not be ignored. Even the most developed states have an inflation of several percent, which, as claims Keynes, it is sometimes beneficial for the economy, as the "oil" to "whitewash" the mechanisms and promote economic growth. In an economy with a growth dynamic changes taking place in prices constantly. Organized markets for securities and other goods are normal for prices to change from one transaction to another. Sometimes, the price of a good or service may be a trend upwards or downwards for a period of months or years. However, that price changes are the result of the change request or offer for goods and services does not imply, necessarily, some change in the general level of prices. Increasing the price of goods or services may be offset by the decrease of others, so that the average price may 320

remain more or less constant. A change in the average level of prices is if there is a stleig tendency for more prices to move up or down. It can thus appreciate that inflation represents the accelerated growth, and the general level of prices, matched by increased money, low purchasing power of money and depreciation under the influence of economic, monetary, social, domestic and foreign policies. Although the idea of a medium level of price is a useful tool, it is important to be aware of its limits....
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