CFA Practice Question

There are 151 practice questions for this study session.

CFA Practice Question

Which of the following statements is false?
A. If projected prices do not reflect expected inflation, the NPV will be biased downward.
B. Inflation can be safely ignored when using the IRR method instead of the NPV.
C. The WACC includes a premium for expected inflation, so the higher the expected inflation rate, the larger the value of the cost of capital.
Explanation: Inflation is reflected in the cost of capital used in a capital budgeting analysis. It cannot be ignored when using the IRR method, since inflation affects the hurdle rate against which the IRR is measured.

User Contributed Comments 1

User Comment
applebee Inf. rate is built in wacc, future CFs should be adjusted UPWARD to reflect inflation, or the NPV will be biased downward.
You need to log in first to add your comment.