Economics Capital Budgeting Questions
The impact of inflation on capital budgeting decisions is that it increases the cost of capital projects. Inflation erodes the purchasing power of money over time, which means that the same amount of money will buy fewer goods and services in the future. As a result, the future cash flows and costs associated with a capital project are likely to be higher due to inflation. This can lead to higher discount rates, longer payback periods, and reduced profitability for capital budgeting decisions. Additionally, inflation can also affect the accuracy of cash flow projections and make it more challenging to estimate future costs and revenues accurately.