Briefly Explain How Inflation Is Treated Consistently While Estimation the Project

Question

Examlex · Accepted Answer

The Answer is There are two ways to treat inflation consistently in the estimation of NPV of a project. If the
discount rate is stated in nominal terms, then consistency requires that project cash flows also be estimated in nominal terms. This might involve using different inflation rates for different components of cash flow. If the discount rate is stated in real terms then real cash flows are estimated for the project. The consistency rule is: discount nominal cash flows at a nominal discount rate and discount real cash flows at a real discount rate.

Briefly Explain How Inflation Is Treated Consistently While Estimation the Project

Definitions: