Abstract
This chapter analyzes the effect of inflation using a case study of two companies (Campa Spain and Campa Argentina) that are engaged in the same business and identical market conditions but with very different inflation rates. The disadvantage of Campa Argentina disappears with respect to Campa Spain after reappraisal (adjustment for inflation) of fixed assets and stocks. However, when inflation is high, company earnings are artificially high (that is, not caused by an improvement in the company's situation), which means that the tax paid is higher than if there was no inflation. Consequently, investments' real returns are less. When the tax authorities allow reappraisal of assets, the company's return is not decreased as a result of inflation. The net profit value of each company's cash flows discounted at the corresponding inflation rate is the same, and likewise the internal rate of return of the project in Spain and Argentina is equal—that is, the two investments' returns are the same.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
