Which approach should be taken to adjust for inflation when calculating net present value?

Question

Quizplus · Accepted Answer

Adjusting for inflation requires estimating cash flows in real terms, which means removing the effect of inflation from the cash flows. Using a real discount rate also removes the effect of inflation from the discounting process, resulting in a net present value that reflects the true value of the investment in today's dollars. Option A is incorrect as it applies different inflation rates to different cash flows. Option B is incorrect as it assumes that the cash flows are already adjusted for inflation. Option D is incorrect as it uses a money discount rate, which does not account for inflation.

Which Approach Should Be Taken to Adjust for Inflation When