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