Aswath Damodaran 237
The ‘‘Consistency Rule” for Cash Flows
! The cash flows on a project and the discount rate used should be defined in
the same terms.
- If cash flows are in dollars (baht), the discount rate has to be a dollar (baht)
discount rate
- If the cash flows are nominal (real), the discount rate has to be nominal (real).
! If consistency is maintained, the project conclusions should be identical, no
matter what cash flows are used.
When working with higher inflation currencies, the discount rates will be higher
but so will the expected growth (because of the inflation)
We are implicitly assuming that current exchange rates are correct and that
expected changes in exchange rates over time will reflect differences in inflation.
To the degree that this is not true, the project analysis might be affected by the
currency in which the analysis is done.
