Proper treatment of inflation in the NPV calculation involves:
I. Discounting nominal cash flows using the nominal discount rate II) Discounting real cash flows using the real discount rate
III. Discounting nominal cash flows using the real discount rates
A) I only
B) II only
C) III only
D) I and II only

Question

Quizplus · Accepted Answer

Proper treatment of inflation in the NPV calculation involves discounting nominal cash flows using the nominal discount rate (I) to account for inflation in the cash flows themselves and discounting real cash flows using the real discount rate (II) to account for inflation in the required rate of return. Therefore, both (I) and (II) are required for an accurate NPV calculation. Choice (III) of discounting nominal cash flows using the real discount rate is incorrect because it does not account for inflation in the cash flows.

Proper Treatment of Inflation in the NPV Calculation Involves