Why Is It Fairly Easy to Fall into the Trap

question 107

Multiple Choice

Why is it fairly easy to fall into the trap of discounting real cash flows with nominal rates?

• A)it is difficult to determine real discount rates.
• B)increases in nominal cash flows are often not forecast.
• C)inflation does not impact cash flows, but it does impact discount rates.
• D)increases in revenues are offset by increases in costs.

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Definitions:

Accounting Rate of Return

A financial metric used to assess the profitability of an investment, calculated as the average annual return over the investment's life divided by the initial investment cost.

Straight-Line Depreciation

An arrangement for apportioning the financial burden of a physical investment throughout its active life in equal yearly disbursements.

Accounting Rate of Return

A financial ratio used to measure the profitability of an investment, calculated as the average annual profit divided by the initial investment cost.

After-Tax Net Income

The amount of money a company earns in a given period after all taxes have been deducted from gross income.