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Comparing an appraisal in real terms with one in nominal terms, the two agree provided

  • A.the cash flows and the discount rate are on the same basis
  • B.the inflation rate is zero over the project's life
  • C.the project life is under five years
  • D.the energy price is assumed constant

Answer: A

Cash flows in today's money must meet a real rate and inflated cash flows a nominal one, and consistently applied either gives the same answer. Mixing them, by discounting today's-money savings at a nominal rate, understates every project.

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