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A member of a project team, acting on behave of the contracting authority, does not understand...

A member of a project team, acting on behave of the contracting authority, does not understand why your financial model must factor in inflation although the inflation has dropped to a single digit. Why should inflation be considered in the financial model although it is on a downward trend?
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Answer #1

Inflation erodes the value of cashflows. Even a single digit inflation can cause huge changes in the net present value of future value of the projects. This change is so substantial that it can lead to acceptance or rejection of project acceptance decisions. Additionally, inflation has a compounding effect on the cash flows. Hence, no matter how small the effect of inflation on a single year cash flows, the cumulative effect of inflation is large enough to consider it in the financial model.

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