International Journal of Finance & Managerial Accounting

International Journal of Finance & Managerial Accounting

Assessing and managing inflation risk in funding investment projects

Document Type : Original Article

Authors
Ali Ahmadi 1
Sayyed Abdolmajid Jalaee 2
Mohsen Zayandehroodi 3
1 PHD student, Islamic Azad University, Kerman, Iran
2 Professor of Economics, Shahid Bahonar University of Kerman, Kerman, Iran
3 Associate Professor, Islamic Azad University, Kerman, Iran
10.22034/ijfma.2025.79025.2346
Abstract
This research assesses and manages inflation risk and international crises in funding investment projects. Using an analytical-descriptive approach and a case study in a pharmaceutical company and with the help of Python coding, the effects of different inflation rates and cost of capital (WACC) on NPV and IRR metrics were analyzed. The numerical findings of the study showed that with the inflation rate rising from 10% to 20% and then 30%, the internal rate of return (IRR) of the project would increase from 32.55% to 46.40% and 59.54% respectively. Also,in the base scenario with an inflation rate of 20% and a capital cost of 27.25%, the net present value (NPV) of the project amounted to 12,056 million riyals was calculated. The sensitivity analysis confirmed that even in the most pessimistic scenario (inflation = 30% and WACC = 35%), the NPV of the project remains positive and equal to 5,349 million riyals.
The results suggest that in projects with inflation-adjusted revenues, the increase in inflation can be accompanied by an increase in NPV and IRR, provided that the IRR exceeds the WACC. This research confirms the need for integrated management of macro and micro risks for the success of long-term investment projects.
Keywords
inflation risk, project financing, investment, project evaluation, net present value (NPV), internal rate of return (IRR)
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