Inflation - how to incorporate it in the DCF model?

Question

anonymous · Answer

If the inflation is substantial you should do the DCF analysis in real terms and not in nominal terms.

anonymous · Answer

When you use historical data for your company or business to compute forecast parameters, implicitly your are taking into account inflation.
For example, revenues, people generally forecast units sold and prices. In the price is where you can consider increments by inflation or you can do the price forecast without inflation (real terms), you can do it either way but be sure to be consistent.

Everything has to be in real or nominal terms (discount rate, forecast cash flows...etc)

anonymous · Answer

Thanks, this answered my question. I am also looking on the Jan. 2011, inflation projections from the federal market comitee, to identify potential "peaks" Looks -  "still" quite stable going forward.  But who can really tell in a high uncertain economic environment.  In the Mckinsey book by Koller, Goedhart and Wessels, they recommend to divide a nominal yield to maturity 10-year government bond on the TIPS, to find the expected inflation. I have not calculated  this number, as I guess  FED's projections is a stronger referance.

anonymous · Answer

It seems to me that you do not  know what you really want. Why bother yourself with isolating the inflation rate since it is already built in the discount rate and in the projected cash flow as well. My suggestion : just go the way indicated by Jmpico.