Download In the process of calculation of NPV

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%