Capital Budgeting with Inflation Consider the following cash flows on two mutually exclusive projects:

Year Project A Project B 0 $40,000 $50,000 1 20,000 10,000 2 15,000 20,000 3 15,000 40,000 The cash flows of project A are expressed in real terms, whereas those of project B are expressed in nominal terms. The appropriate nominal discount rate is 15 percent and the inflation rate is 4 percent. Which project should you choose? LO.1