1. Which one of the following methods will provide a correct analysis for capital budgeting purposes?
A) Discounting real cash flows with real rates
B) Discounting real cash flows with nominal rates
C) Discounting nominal cash flows with real rates
D) Discounting nominal cash flows with either real or nominal rates
2. A firm is considering a capital investment project that will require an immediate investment of $1,000. The project is expected to generate the following cash inflows: Year 1: $300; Year 2: 400; Year 3: $500. Assuming the firm's risk-adjusted required rate of return for this project is 5%. What is the IRR (internal rate of return) of this project? Choose the closest answer.
5%
11%
9%
7%