Proper treatment of inflation in NPV calculations involves:
I.discounting nominal cash flows by the nominal discount rate;
II.discounting real cash flows by the real discount rate;
III.discounting nominal cash flows by the real discount rate
A)I only
B)II only
C)III only
D)I and II only

Question

Quizplus · Accepted Answer

Proper treatment of inflation in NPV calculations involves discounting nominal cash flows by the nominal discount rate (I) and discounting real cash flows by the real discount rate (II). Therefore, the correct choice is D, which includes both I and II. Option III, which involves discounting nominal cash flows by the real discount rate, is not a valid approach for accounting for inflation in NPV calculations.

Proper Treatment of Inflation in NPV Calculations Involves