Question

Suggest ways that one can compensate for the effects of inflation when preparing cost estimates.

Suggest ways that one can compensate for the effects of inflation when preparing cost estimates.

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Answer #1

Inflation affects cost estimate in a significant way. The following are the 2 ways in which one can compensate for the effects of inflation when preparing cost estimates

  1. Inflation effect can be removed while preparing cost estimates by taking the real rate of return instead of market return. While calculating the real rate of return we subtract the inflation from the market return.
  2. To compensate for the effects of inflation when preparing cost estimates all costs must be discounted to present value. When all costs will be discounted at the present value the discount rate will take into effect the rate of inflation .Therefore, it will help in compensating the effect of inflation.
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