You and a colleague have been discussing choices to be made before starting work on developing a cash flow forecast for a new potential project that your company is considering. You have decided on some structural parameters, including timing of projected cash flows (quarterly in the construction period, and semi-annual in the operating period), and the accounts you will need to include

You now face a choice of whether to develop your forecast in constant dollars or current dollars. You are preparing some thoughts for a discussion with your colleague in which the aim will be to make a choice and agree on some background points and a rationale for your recommendation, which you will then together present to your supervisor

In preparation for the discussion, answer the following questions briefly:

(a)What are constant dollars, and what is one possible generic advantage of preparing a cash flow forecast in constant dollars?

(b)What are current dollars, and what is one possible generic advantage of preparing a cash flow forecast in current dollars?

(c)You areprovided with the following additional information: currently, inflation is very low and expected to remain so for a period that would likely extend past the construction of the project; a number of cash flow forecasts for previous projects have been sentto you to help you select a discount rate, but you do not yet know which were prepared in constant dollars and which in current dollars. Based on your answers to (a) and (b) and the additional information you have been given, what do you think you and your colleague should recommend to your supervisor? Indicate which of constant or current dollars you recommend and why, and at least one other point relevant to this structural issue