I am looking for some guidance regarding model predictions of revenue and expenditure numbers.
I have done a predictive model using ETS to predict revenue for a client and received a question regarding the net present value of the results. The question is: "Should the predicted values for future years be discounted to be nominal or should they be adjusted for inflation?"
My thinking is that the historical revenue (10 years) have grown with inflation as well as growth in volume and the ETS model use the trend (no seasonality) to forecast revenue for future years. The forecast should therefore include an assumption for inflation as well as volume growth. I therefore assume that the future values include an adjustment for inflation and should thus be discounted to get the nominal values at time p0.
I will appreciate any feedback about the accuracy of this assumption or any additional advice.