(Identifying nominal numbers) A company is considering an investment that would cost $25,000 and return a net after-tax cash flow of $8,000 per year in each of the next five years.

a. Assume these figures include inflation forecasts. What numbers should enter the capital budgeting analysis?

b. Now assume the above figures do not include inflation, forecast to be 6% per year. What numbers should enter the capital budgeting analysis?

c. Why must the cash flows used in capital budgeting contain the impact of inflation?

d. What would be the bias if the impact of inflation were left out