Consider the following statements about the accounting for inflation in a capital budgeting analysis:
I. An analyst can use nominal dollars in conjunction with a nominal interest rate.
II. An analyst can use real dollars in conjunction with a real interest rate.
III. An analyst can use nominal dollars in conjunction with a real interest rate.
Which of the above statements is (are) correct?

Question

Quizplus · Accepted Answer

Statements I and II are correct because in capital budgeting analysis, an analyst can either use nominal dollars with a nominal interest rate or real dollars with a real interest rate to maintain consistency in the analysis. Using nominal dollars with a real interest rate (Statement III) is incorrect because it mixes real and nominal terms, leading to inaccurate analysis.

Consider the Following Statements About the Accounting for Inflation in a Capital