Answer to Question #229011 in Finance for hmo

Question

List in (bullet points) the process you would follow when attempting an inflation and risk adjusted NPV

analysis. This includes cash flow identification and possible adjustments to cash

flows; also outline the most accurate discount rate to use.

Answer 1

NPV analysis takes into account future expectations of cost and revenue. It is go by substracting risk free rate of return from the market of return.

cash flows

• cash flows contain inflation effects.
• Nominal cash flow is discounted t nominal discount rate.

Discount rate

• interest rate is subject to risks
• discount rate must consider risk like investment and adjust it.

it is better to use discount rate because interest rate has effect to the money supply in the economy