Here is my understanding: Inflation reduces the real value of a payment. If inflation is higher than expected, it will reduce the value of tax shield (related to depreciation) and increase the real taxes payable to the Taxman. On the flip side, if inlation is lower than expected, it will incease the value of tax shield and decrease the value of real taxes payable to the Taxman. With this understanding, I am trying to answer Question # 9 and Question # 48. Obviously, I am wrong. I can follow the logic of Question # 48 but CFAI didn’t deem it necessary to explain Question # 9 in detail. Cany anoyone point any errors in my interpretation? Thanks
Please ignore the above question. I just looked at the CFAI errata for Level II and they have addressed this inconsistency.