For creation of the business plan as close as possible to reality, in it the factor of inflation because of which the money which is in circulation depreciates eventually has to be considered. Inflation affects practically all aspects of financial activity of any company. Especially strongly this factor influences carrying out long-term financial transactions.
Instruction
1. Rate of inflation is used for assessment of intensity of inflationary processes, their dynamics along with the index of inflation. It characterizes the speed of depreciation of money and decrease in purchasing power for a certain period. Rate of inflation is expressed by gain of the average level of the prices in percentage to their face value for the beginning of the studied period.
2. At the conclusion of long-term contracts it is necessary to determine the predicted annual rate of inflation and growth of its index. For this purpose it is necessary to calculate the expected average monthly rates of gain of inflation. This information can be taken in the published forecasts of economic and social development of the country for the forthcoming period. Results of these forecasts also become a basis of the subsequent accounting of a factor of inflation in financial activity of the company.
3. The predicted annual rate of inflation (TIg) is calculated by a formula: TIg = (1+ TIm) n – 1, where: TIm - the expected average monthly rate of inflation in the forthcoming period, n – degree in which it is necessary to build number (1+ TIm), equal to the number of months in the predicted period. If the period – year, then n = 12.
4. You can calculate not only the predicted annual rate of inflation, but also value of this parameter by this formula for any forthcoming period. For example, if calculation covers the period two years, then degree of n in which the number (1+ TIm) is built will be equal to 24.
5. Rate of inflation can be used for calculation of the predicted annual index of inflation (IIg): IIg = 1 + TIg, or: IIg = (1 + TIm) n.
6. The indicator of rate of inflation is used also for formation of the real interest rate considering an inflation factor. For this calculation use the predicted nominal level of an interest rate in the financial market which usually is reflected in the prices of future and option contracts in stock exchange. According to Fischer's Model, the real interest rate of Ip is calculated by a formula: Ip = (I – TI) / (1 + TI), where: I – a nominal interest rate (actual or predicted for a certain period.