Which one 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) Discounting nominal cash flows with either real or nominal rates.

Question

Quizplus · Accepted Answer

Discounting real cash flows with real rates is the correct analysis for capital budgeting purposes. This approach takes into account the time value of money and inflation, providing a more accurate picture of the actual worth of potential investments. Discounting nominal cash flows or using nominal rates can lead to inaccurate results, as they do not account for inflation.

Which One of the Following Methods Will Provide a Correct