Question

Which one of these is a requirement when computing the net present value of a capital project? A) The discount rate used must be a nominal rate. B) The discount rate must be stated in real terms. C) Nominal cash flows must be discounted using a real rate. D) Real cash flows must be converted to nominal cash flows. E) Real cash flows must be discounted using a real rate.

Answer 1

E) Real cash flows must be discounted using a real rate.

Step-by-step explanation:

When there is inflation expected during the project life teh company must calcualte the real rate and then, work the real cash flow(net of inflation) with the real rate.

Alternative, it can work the nominal cash flow at the ominal discount rate.

Both should give the same answer. From the proposed alternatives the only that seems true is the option E