Capital budgeting and uncertain inflation

In this article, capital budgeting is examined under uncertain inflation. The market value of a risky asset is shown to be greatly influenced by uncertain inflation. Risk- adjusted discount rates and certainty equivalent factors are determined by risks due to potential changes in investors' expectations in response to changes in the unanticipated inflation rate and market conditions over time. A serious error in capital budgeting decision may be resulted if the impact of uncertain inflation is ignored in the valuation process.