You are trying to compare the present values of two separate streams of cash flows which have equivalent risks.One stream is expressed in nominal values and the other stream is expressed in real values.You decide to discount the nominal cash flows using a nominal annual rate of 8 percent.What rate should you use to discount the real cash flows?

Question

Quizplus · Accepted Answer

To compare the present values of two streams of cash flows, they should be discounted at the same rate. Since one stream is expressed in nominal values and the other in real values, we need to use a comparable real rate to discount the real cash flows. Therefore, the best choice is to discount the real cash flows using a comparable real rate.

You Are Trying to Compare the Present Values of Two