CAF-7 · Chapter 13 · Question 10 of 15
When dealing with inflation in an NPV calculation, what is the fundamental rule for matching cash flows to discount rates?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Money (nominal) cash flows must be discounted at the money (nominal) cost of capital
Explanation
The fundamental rule for consistency in investment appraisal under inflation is to match like with like. If you inflate the specific cash flows (money cash flows), you must discount them using a rate that also includes inflation (the money/nominal cost of capital).
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