In order to compensate for inflation in capital budgeting procedures, it is necessary to:
A) use constant dollar estimates of costs and revenues
B) use a low discount rate to avoid double counting for inflationary effects
C) rely heavily on the payback procedures
D) none of the above

Question

Quizplus · Accepted Answer

In capital budgeting, to compensate for inflation, nominal cash flows (which include inflation) should be used with a nominal discount rate, or real cash flows (which exclude inflation) should be used with a real discount rate. None of the options provided correctly describe this approach.

In Order to Compensate for Inflation in Capital Budgeting Procedures