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> The $200 million made in year 10 by Growth is only with $122 million (year 1 dollars). > So you can see, future money is less valuable in an inflationary env

> The $200 million made in year 10 by Growth is only with $122 million (year 1 dollars). > So you can see, future money is less valuable in an inflationary environment. In contrast, the $100 million made by Established is worth $160 million in year 10. I'm a little confused by this. If $200 million was projected as the future earnings of the growth company, isn't it likely that that will also change with inflation? In other words, if we think today that Growth will make $200 million in 10 years, based on inputs X, Y, and Z, then aren't X, Y, and Z also affected by inflation in the future, and so Growth would be affected downstream by this? E.g. maybe part of the $200 million projection is that X will spend 20% of funds on Growth. But now we multiply that 20% by the effects of inflation -- (1.05)^10 -- and X has more to spend, and so Growth makes more as well, proportional to the increase from inflation. I guess what I'm getting at is that inflation affects everything. In your example, it's as if Growth has some static 10-year-out contract for $200 million, which feels a little odd.

bruce511 5y ago
Except that inflation does not affect everything, or more accurately it affects everything differently. Inflation can be viewed as a change in supply /demand ratios. So car chips supply goes down, demand for cars is constant, price goes up. Lumber Mills closed during lockdown, supply of lumber constrained, demand goes up, price goes up. But the price of lumber, and cars, are not really linked. Yes, some commodities have knock-on effects - food and energy being prime examples - when oil goes up that tends to impact large areas of the economy because large areas have oil in their supply chain. So, whole average inflation is a useful benchmark number, it may, or may not, impact a companies future earnings, or more precisely, it may not impact earnings and costs in the same way.
dragontamer 5y ago
Let's continue the example. Established owns a $1 billion factory (equipment and real estate) to make it's $100/year profits. Growth doesn't own anything yet, they have to build that factory before they get their profits. ---------- The $1 billion factory will itself be worth $1.07 billion after 7% inflation, and the $1.14 the year after that (after another 7% inflation).

bruce511 5y ago

Except that inflation does not affect everything, or more accurately it affects everything differently. Inflation can be viewed as a change in supply /demand ratios. So car chips supply goes down, demand for cars is constant, price goes up. Lumber Mills closed during lockdown, supply of lumber constrained, demand goes up, price goes up. But the price of lumber, and cars, are not really linked. Yes, some commodities have knock-on effects - food and energy being prime examples - when oil goes up that tends to impact large areas of the economy because large areas have oil in their supply chain. So, whole average inflation is a useful benchmark number, it may, or may not, impact a companies future earnings, or more precisely, it may not impact earnings and costs in the same way.

dragontamer 5y ago

Let's continue the example. Established owns a $1 billion factory (equipment and real estate) to make it's $100/year profits. Growth doesn't own anything yet, they have to build that factory before they get their profits. ---------- The $1 billion factory will itself be worth $1.07 billion after 7% inflation, and the $1.14 the year after that (after another 7% inflation).