07-10-2012, 04:13 PM
A common problem, which complicates the practical investment decision-making, is inflation. The rule of the game is, as we shall emphasize in the flowing discussions, to be consistent in treating inflation in the cash flows and the discount rate. Inflation is a fact of life all over the world. A double-digit rate of inflation is a common feature in developing countries. Because the cash flows of an investment project occur over a long period of time, a firm should usually be concerned about impact of inflation on the projects profitability.