The nominal approach to incorporating inflation into the net present value method predicts ________.
A) cash inflows and outflows in nominal monetary units and uses a real rate as the required rate of return
B) cash inflows and outflows in real monetary units and uses a nominal rate as the required rate of return
C) cash inflows and outflows in real monetary units and uses a real rate as the required rate of return
D) cash inflows and outflows in nominal monetary units and uses a nominal rate as the required rate of return

Question

Quizplus · Accepted Answer

The nominal approach to incorporating inflation into the net present value method predicts cash inflows and outflows in nominal monetary units and uses a nominal rate as the required rate of return. This approach takes into account the effect of inflation on future cash flows by assuming that they will increase at the same rate as inflation. Therefore, using a nominal rate of return accounts for both the expected cash flow and inflation.

The Nominal Approach to Incorporating Inflation into the Net Present