Question 7.3: Explain whether general inflation or specific inflation shou...
Explain whether general inflation or specific inflation should be included in investment
appraisal.
Evaluating investment projects is made more difficult by the existence of inflation. While it may be possible to forecast general inflation into the near future, it is much harder to fore cast specific inflation rates for individual costs and revenues. If specific inflation forecasts can be obtained and used, it is likely that the evaluation of an investment project will be more accurate than if account were taken only of general inflation. The incremental benefit of this increased accuracy would need to be weighed against the cost of obtaining and processing the necessary data, however. Failure to take account of inflation at all might lead to unrealistic estimates of the value of an investment project.