Question: 3) Flexibility consideration: What if the annual inflation factor needs to be considered? Hints: So far in that example on the Power Point, all items

3) Flexibility consideration: What if the annual inflation factor needs to be considered? Hints: So far in that example on the Power Point, all items such as annual sales or costs are given as real (deflated) CFs without inflations, because those annual growths in sales or costs are due to higher market demands, not due to price inflation. On the other hand, CAT's WACC --- which we have calculated previously on the basis of financial market quotes --- is a "nominal (inflated)" rather than "real (deflated)" return. Is it suitable to discount real-term (deflated) FCFs by such a nominal (inflated) WACC derived from financial market quotes? Nope. Then what should we do to adjust for the inflation factor when computing NPV, MIRR & EAA?

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