The consequences of evaluating a project based on its actual dollar cash flows but using a real rate to discount the cash flows would be an overestimation of the true value of the project. This is because when using a real rate, inflation is not taken into account and thus, the present value of future cash flows will be lower than their actual amounts.
What would be the consequences if managers of a firm evaluated a project based on its actual dollar cash flows, but used a real rate to discount the cash flows?
This overestimation can lead to incorrect decision making on the part of managers as they are likely to believe that they are making more money from a given project than they actually are. For instance, if managers were deciding whether or not to invest in a new production facility, they may make this decision based on inflated estimates which do not take into account inflation over time. Furthermore ,this could also lead them down path risky investments since overly optimistic assumptions exist surrounding how much money could potentially made particular venture too
Additionally ,not taking inflation into consideration when calculating present values can lead companies problems down line due lost opportunity costs associated having put resources towards projects turn out yield less return expected originally . For example if company invested large sum capital upfront expecting generate certain amount revenue back time then found didn’t due underestimating impact inflation had overall scenario finally arriving same conclusion end day it would have been better simply kept money elsewhere begin with instead . As such being mindful all factors involved crucial be successful financial standpoint strive achieve best results possible both short long run here too .
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