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
- 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.
- 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.