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In the process of calculation of NPV, the cash flows are discounted using the rate of return. The treasury staff is concerned that the rate of return used by the company is nominal rate of return and is not adjusted for inflation. The treasury staff is correct in this respect. The cash flows and rate of return used in the process of calculation of NPV should be consistent in relation to inflation. Either both cash flows and rate of return should be nominal or both should be real. The cash flows considered in the cash flows are same throughout the life of project. The cash flows are not adjusted for inflation. Hence rate of return should also be real i.e. 7%