Assume you computed the NPV of a project using nominal values.Your partner computed the NPV of the identical project using real values,given a positive rate of inflation.When you compare your results,you should discover that

Question

Quizplus · Accepted Answer

The difference between nominal and real values is the effect of inflation. If the project cash flows are computed using nominal values, they contain the effect of inflation. On the other hand, real values are adjusted for inflation, and do not contain the effect of inflation.

Thus, if both computations are done correctly, the only difference should be the presence or absence of inflation. The discount rate used for both should be the same, and therefore the NPV values should be identical, except for the effect of inflation. Therefore, the correct answer is E, your NPV values are identical.

Assume You Computed the NPV of a Project Using Nominal