A firm is considering a project that has cash flows indexed to the consumer price index.What discount rate should be used?

Question

Quizplus · Accepted Answer

The best choice would be a rate that uses the consumer price index in its measure, as this would adjust for inflation and provide a more accurate discount rate for cash flows indexed to the consumer price index. The nominal discount rate does not take inflation into account, and the yield to maturity may not accurately reflect the inflationary pressures on the project's cash flows. The change in consumer price index is not a discount rate.

A Firm Is Considering a Project That Has Cash Flows