Double Counting or Omitting Effects of Risk Factors

C

To avoid double counting or omitting the effects of risk factors, the assumptions used in analyzing cash flows should be consistent with those inherent in the cash flows. This means that the assumptions should reflect the actual economic conditions that the cash flows are subject to, and not introduce any additional biases or assumptions that could distort the analysis.

Option A, economic flow, refers to the actual cash flows that are expected to be generated by an investment or asset, and is therefore consistent with the requirement of reflecting the inherent characteristics of the cash flows.

Option B, nominal flows, refers to cash flows that have not been adjusted for inflation. While nominal cash flows may be useful in certain contexts, they do not reflect the true economic conditions that the cash flows are subject to, and can introduce biases or distortions into the analysis.

Option C, discount rates, are used to calculate the present value of future cash flows, and should be consistent with the risk inherent in those cash flows. However, while the choice of discount rate is important in avoiding double counting or omitting risk factors, it is not sufficient by itself to ensure that assumptions are consistent with inherent cash flow characteristics.

Option D, inflation effect, refers to the impact that inflation can have on the value of cash flows over time. While it is important to account for inflation in cash flow analysis, it is not sufficient by itself to ensure that assumptions are consistent with inherent cash flow characteristics.

Therefore, the most appropriate answer to the question is A, economic flow, as it reflects the actual cash flows that are expected to be generated by an investment or asset and is consistent with the requirement of reflecting the inherent characteristics of the cash flows.