Greenspan Inc

Greenspan Inc. discounts cash flows at a nominal rate of 10%. Inflation over the next few years is expected to average 3%. Which of the following would be a correct adjustment for inflation when computing net present value?

A) Discount cash flows at 10%; increase revenues and expenses by 3% each year.
B) Discount cash flows at 13%; increase revenues and expenses by 3% each year.
C) Discount cash flows at 7%; ignore inflation when forecasting revenues and expenses.
D) Either A or C would be acceptable.

Correct Answer:

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