Hi, I’m reviewing my notes of every Reading I’ve done, and got confused with something in Capital Budgeting of Corporate Finance, in the explanation of Inflation existence.
We are supposed to use the same type of discount interest rate, as the type of the cash flows of the project (I mean nominal o real). But in the case of inflation, WACC is automatically increased (since corporate bonds provide a poor hedge against inflation; demand falls and their cost rises). So to avoid a decrease in NPV of the projects, we should also increase their Cash Flows.
My confusion is, if cash flows are nominal, we should use a nominal discount rate, and avoid any further adjustments. So, if we are given de required return on equity and debt, the capital structure, and the cash flows, should we adjust them under an inflationary scenario? Aren’t the required rates and wacc usually stated as “nominal”, unless it says so?