Capital Budgeting with Inflation Consider the following cash flows on two mutually exclusive projects:
Year | Project A | Project B |
0 | ‒$50,000 | ‒$65,000 |
1 | 30,000 | 29,000 |
2 | 25,000 | 38,000 |
3 | 20,000 | 41,000 |
The cash flows of project A are expressed in real terms, whereas those of project B are expressed in nominal terms. The appropriate nominal discount rate is 15 percent and the inflation rate is 4 percent. Which project should you choose?
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