Which of the following methods will provide a correct analysis for capital budgeting purposes?
A) Discounting real cash flows with real rates.
B) Discounting real cash flows with nominal rates.
C) Discounting nominal cash flows with real rates.
D) All of these methods will provide similar results.

Question

Quizplus · Accepted Answer

Discounting real cash flows with real rates is the most accurate method for capital budgeting purposes as it takes into account both the inflation rate and the nominal interest rate. Discounting with nominal rates or using nominal cash flows does not adequately account for the effects of inflation, leading to less accurate results.

Which of the Following Methods Will Provide a Correct Analysis