Quote:
Originally Posted by GGG
doesnt applying the discount rate to the cash flow when you sell the asset at the end account for the inflation on the franchise value?
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I take your point. It can, but it doesn't account for the tax on the phantom capital gains due to inflation when you sell the asset… and after that things start to get hinky.
The other issue is that you proposed increasing the profit by 3-5% per year entirely on account of inflation. If inflation averages that high over the life of the arena, you need to take that into account with a higher discount rate. Bingo's proposed discount rate, I should think, is based on an expectation that recent monetary trends will continue, that inflation will average well under 3%, and money will remain cheap.
It would be interesting to see what happens if you back inflation out of the figures altogether, say by lowering the discount rate to 8% and including only expected profit increases above the inflation rate.