Especially for projects with longer investment horizons, it is crucial that we treat inflation in a consistent way. This section first introduces the concept of inflation and shows how we can express cash flows and discount rates in nominal (actual dollars) and real (adjusted for inflation) terms. For project valuation, the rule is very simple: Always apply nominal discount rates to nominal cash flows and real discount rates to real cash flows. If we implement this simple rule correctly, the resulting project value will be the same.
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