The effect of purchasing power or inflation on present value is important because _________?
Correct answer: B. It reduces the real value of cash flows received in the future
- A. It increases the real value of cash flows received in the future
- B. It reduces the real value of cash flows received in the future
- C. It has no effect on real value of cash flow received in the future
- D. None of these
Explanation
Inflation reduces purchasing power, so a fixed amount of cash received in the future has lower real value when expressed in today's purchasing power. This is why inflation must be considered in present-value calculations.
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Business finance explains how organisations plan, obtain and use money while balancing risk, return and liquidity. Topics include financial statements, time value of money, budgeting, working capital, capital structure, sources of finance, investment appraisal and cost of capital. Capital budgeting evaluates long-term projects, whereas working capital manages day-to-day operations.
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