Get inflation factor

This function calculates the inflation factor based on inflation rate.

Usage

get_inflation_factor(n_years, inflation_rate = NULL, is_deflation = FALSE)

Arguments

n_years: Numeric value referring to number of years in the future to be considered in the discounting and/or inflation. Be aware that the year 0 (without discounting/inflation, i.e. the present) is not be counted here. If a vector is entered in the argument impact, n_years does not need to be entered (length of impact = n_years + 1).
inflation_rate: Numeric value between 0 and 1 referring to the annual inflation (increase of prices). This value is used to adjust monetization for inflation (converting nominal into real values by appyling a deflator). Alternatively, a numeric vector of year-specific rates can be entered (at least as many values as years to be considered, the first value referring to the first year after the present), assuming then that inflation varies over time instead of being constant. If this adjustment for inflation is not needed leave this argument empty (default value = NULL).
is_deflation: Boolean value (TRUE vs. FALSE) referring to the type of inflation factor. FALSE (default) means inflate present values to future nominal values, while TRUE means deflate future nominal values to present real values

Value

This function returns the numeric inflation factor.

Details

Methodology

This function is called inside monetize().

It calculates the inflation factor based on the inflation rate and the number of years into the future as described in Brealey et al. (2023) .

If inflation_rate contains one single value, inflation is assumed to be constant over time and the inflation factor increases exponentially with the number of years. If inflation_rate contains a vector of year-specific rates, the inflation factor is the product of the year-specific factors, which better reflects that inflation varies over time. In that case, inflation_rate must contain at least as many values as years to be considered (n_years), the first value referring to the first year after the present.

Detailed information about the methodology (including equations) is available in the package vignette. More specifically, see chapters:

Monetization

References

Brealey RA, Myers SC, Allen F, Benninga S, Read J (2023). Principles of Corporate Finance, 14th edition. McGraw-Hill Education, New York, NY. ISBN 978-1264117464.

Author

Alberto Castro & Axel Luyten

Examples

# Constant inflation rate
get_inflation_factor(
  inflation_rate = 0.02,
  n_years = 5
)
#> [1] 1.104081

# Year-specific inflation rates
get_inflation_factor(
  inflation_rate = c(0.02, 0.03, 0.05, 0.04, 0.02),
  n_years = 5
)
#> [1] 1.1702