It is very vital to adapt investment assessment

m e t h o d s t o c o p e w i t h t h e t r e n d o f p r i c e movement.
Inflation represents the rate at which the real value of an
investment is eroded andthe loss in purchasing power over
time. Inflation portrays to investors exactly how much of
areturn their investments will provide to position them to for
the purposes of maintaining their standard of living.
Inflation erodes an investment annual rate of return. When
inflation rate ishigher than the rate of return, the investor loses
money on their investment. Rising inflation ratewill lead to increase
in the rate of return required by the firm’s security holders. A
nominal approach to investment evaluation discounts nominal
cash flows with the nominalcost of capital. ominal cash flows
in this case are gotten by inflating forecasts values
fromcurrent price estimate for example by using specific
inflation! this is through inflating pro"ect cash flows by
different inflation rates for purposes of generating nominal pro"ect
cash flows. A real approach to investment evaluation discounts real
cash flows with the real cost of capital.#he real cash flows are
arrived by deflating nominal cash flows by general inflation rate.
Also,the real cost of capital is found by deflating the nominal
cost of capital by the general inflation rate, by using the common
$nown fisher equation. %&'real discount rate(%&'inflation rate( )
%&'nominal discount rate(
b. . !alculate the expected net present value and
profitabilit" indexes of the threeprojects#
ominal rate of return ) &*+, rate of inflation )& +Real rate of
return ) %&'-.&*( %&'-.& ( ) &.&*/&.& ) &.-012 ) 0.*+

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