Answer (B) is correct . In an inflationary environment, nominal future cash flows should increase to reflect the decrease in the value of the unit of measure. Also, the investor should increase the discount rate to reflect the increased inflation premium arising from the additional uncertainty. Lenders will require a higher interest rate in an inflationary environment.
Answer (A) is incorrect because Future cash flows should also increase.
Answer (C) is incorrect because The discount rate should be increased to take into consideration future uncertainty and the risk premium that lenders will require in an inflationary environment.
Answer (D) is incorrect because Cash flows should increase in an inflationary environment.
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