If the discount rate is stated in nominal terms, then in order to calculate the NPV in a consistent manner requires that project:
I. cash flows be estimated in nominal terms
II. cash flows be estimated in real terms
III. accounting income be used
A) I only
B) II only
C) III only
D) None of the above

Question

Quizplus · Accepted Answer

When the discount rate is stated in nominal terms, it is important to estimate the cash flows in nominal terms as well to ensure consistency in the calculation of NPV. Real terms do not take inflation into account, which is important when dealing with nominal discount rates. Accounting income is not relevant in determining the NPV of a project.

If the Discount Rate Is Stated in Nominal Terms, Then