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State two ways in which inflation can be handled in investment analysis. Which way would you...

State two ways in which inflation can be handled in investment analysis. Which way would you recommend and why?

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Answer #1

Inflation can be handled in Investment analysis in following two ways-

A. Adjustment of discounting rate with the risk weightage in association with the inflation- Discounting rate should be adjusted in accordance with the inflation in the economy which will be providing with an appropriate rate which is used for discounting with the the overall cash flows and which will reflect the true cash flows after the effect of inflation

B. One can also try to consider the real rate of interest and one should also try to considered a time value of money factor in order to eliminate the effect of inflation from the overall Investment analysis in order to have a true and fair structure of the cash flows.

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