Capital budgeting and inflation Students often confuse nominal and real cash flows and discount rates. Emphasise that in the nominal approach, students must put everything in terms of the future-year Euros (using the cumulative inflation rate factor) and then discount back to the present value using the nominal real plus inflation) discount rate. That is, future cash flows are first compounded up by the cumulative inflation factor and then discounted back by the (real plus inflation) discount rate. While this may appear to be doing and then undoing the effect of inflation, it is necessary because the effects on the interest rates are nonlinear.
