When analyzing a project, if the expected future cash flows are denominated in nominal dollars, then the discount rate should represent a nominal rate as well.

Question

Quizplus · Accepted Answer

This is because the discount rate should reflect the time value of money, which includes both the expected inflation rate and the real rate of return. If the cash flows are nominal, they already include an inflation component, so the discount rate should also be nominal to properly account for this inflation.

When Analyzing a Project, If the Expected Future Cash Flows