A financial analyst is evaluating an industrial project with a specific estimated raw cash flow (Q3) expected in Year 3. The company’s cost of capital is K, and the expected inflation rate is g. According to the course formulas, there are two ways to account for inflation when calculating Present Value. Which of the following mathematical operations will yield the correct Present Value for this specific Year 3 cash flow?

Question

Accepted Answer

Both B and C are mathematically equivalent and will yield the exact same correct result.

Answer

Modify  Q3  directly by dividing it by  (1 + (K-g)/(1+g))^3

Answer

Multiply  Q3  by  (1+g)^3  to account for inflation, and then divide by  (1+K)^3

Answer

Modify  Q3  using  (1 + K)^3  and then subtract the inflation rate  g

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A financial analyst is evaluating an industrial project with a specific estimate...

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