3. Cost of money Four fundamental factors affect the cost of money: (1) the return that borrowers expect to earn on their investments, (2) the preference of savers spend their income in the current period rather than delay their consumption until some future period, (3) the risks associated with the investmen and (4) expected inflation. Consider the following statements that address these factors, and indicate which you think are true. Statement 1: The onset of inflation results in a loss of purchasing power when an investment pays constant cash flows. Statement 2: Historical inflation rates, as opposed to expected future rates of inflation, should be used when calculating an investment's nominal risk-free rate of return. Statement 3: Projects Z10 and A20 are otherwise identical investments except for one important difference: The cash flows expected from Project A20 are twice as likely to be realized as those expected from Project 210. This means that Project 210 is more risky than Project A20 Statement 4: The inflation premium used to calculate the nominal Interest rate on a five-year security should be equal to the rate of inflation expected in year 5 of the investment The true statements are: 1, 2, 3, and 4 1 and 3 2 and 4 1, 2, and 3