When adjusting for inflation, there are two methods. The real- rate method where the discount rate is adjusted for inflation and the nominal approach, where real cash flows are adjusted to nominal cash flows. What is the primary drawback of the real-rate approach? a. It is more cumbersome to calculate. b. Depreciation deductions are adjusted for inflation. c. There are no drawbacks.

When adjusting for inflation, there are two methods. The real- rate method where the discount rate is adjusted for inflation and the nominal approach, where real cash flows are adjusted to nominal cash flows. What is the primary drawback of the real-rate approach? a. It is more cumbersome to calculate. b. Depreciation deductions are adjusted for inflation. c. There are no drawbacks.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk

Section: Chapter Questions

Problem 3Q: Why is it true, in general, that a failure to adjust expected cash flows for expected inflation...

See similar textbooks

Similar questions

In the discounted cashflow method, the discount rate is used for the following reasons EXCEPTa. it removes the timing differences of cashflows.b. it serves as the required rate of return of the asset being valued.c. it removes the expected riskiness of differing assetsd. it equalizes cash inflows to cash outflows so that the value would equal to the market value.
Why is it true, in general, that a failure to adjust expected cash flows for expected inflation biases the calculated NPV downward?
Based on your understanding of the fAactors that affect the cost of money, Identify which of the following statement is true. a. higher inflation leads to lower interest rates. b. Interest is the price paid to borrow funds. c. Higher risk leads to lower interest rates.
Which of the following statements is CORRECT? a. The future value of an annuity table is most useful in the short-cut calculation of the future value of uneven cash flows. b. The formula or equation for the calculation of the present value can be used only in even cash flows that are paid or received at regular time intervals and subject to a constant discount rate. c. The present value of an annuity table is most useful in the short-cut calculation of the present value of uneven cash flows. d. The formula or equation for the calculation of the future value can be used also in regular annuity and subject to a fluctuating rate of return.
Which of the following method is not based on concept of time value of money? A. Discounted payback period B. Accounting rate of return C. Profitability index D. Modified internal rate of return
Which of the following statements is not correct? Select the correct response: The principal amount of a debt is the cash or cash equivalent amount borrowed The carrying amount of a noninterest-bearing note payable due in lump sum will decrease as time goes by When a noncash asset is acquired and the stated rate of interest is different from the current market rate of interest, the cost of the asset is the present value of the future cash payments discounted at the current market rate of interest rather than at the stated interest rate. A company that receives cash in an amount less than the face amount of a noninterest-bearing note payable should record the note at its discounted present value.
A change in money demand or a shift in the money demand curve is caused by a change in * the interest rate. non-interest determinants. cost of borrowing. all of the above
One of the shortcoming of the payback method is that it ignores cash flows after the payback period. True False
What are the two drawbacks associated with the payback period a. The time value of money is ignored.It ignores cash flows beyond the payback period b. The time value of money is considered.It ignores cash flows beyond the payback period c. The time value of money is considered.It includes cash flows beyond the payback period d. The time value of money is ignored.It includes cash flows beyond the payback period
there are two policies to consider when payment period is less than compounding period. These are related to interperiod cash flows earn. Select one: O True O False
TRUE OR FALSE. IF FALSE CORRECT THE SENTENCE. A. True OR False: Deferred Annuities are annuities that have payments that don't begin until after the end of the second period. B. Uniform gradient cash flow is a cash flow that increases by a uniform amount each period, beginning at the end of period one.
To find NPV, it requires Choices: A.none of the choices B.discount rate and estimated cash flows C.investment amount plus discount rate D.discount rate and inflation rate E.estimated cash flow and capital structure