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The capital budgeting results would be unrealistic if the impact of inflation is not correctly factored in the analysis. The cash flow estimate will not reflect the purchasing power. In other words, cash flows would as shown at inflated sums and, to that extent, cause distortion in capital budgeting decisions. The flows should be accommodate the inflation factor so that the capital budgeting definition reflect the true picture. This Section dwells on the procedure for adjusting data for inflation.

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