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There is evidence to suggest that some businesses fail to consider inflation in investment decisions. Does this

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There is evidence to suggest that some businesses fail to consider inflation in investment decisions. Does this really matter given that, in recent years, the level of inflation has been low? What would be the effect on NPV calculations (that is, would NPV be overstated or understated) if inflation is dealt with incorrectly by:
(a) Discounting nominal cash flows at real discount rates?
(b) Discounting real cash flows at a nominal discount rate?
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Although inflation rates have been quite low in recent years the eff...View the full answer


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Financial Management for Decision Makers

Financial Management for Decision Makers

ISBN: 978-0138011604

2nd Canadian edition

Authors: Peter Atrill, Paul Hurley

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NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

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