What must be factored in when calculating net present value related to investment opportunities?

When calculating net present value (NPV) related to investment opportunities, inflation rates must be factored in because they directly affect the purchasing power of future cash flows. NPV is a method used to determine the value of an investment by calculating the present value of expected future cash flows, discounted at a specified rate. If inflation is not considered, the future cash flows may appear higher in nominal terms but lower in real value, which can lead to an overestimation of the investment's true profitability.

Incorporating inflation allows for a more accurate assessment of whether the investment will yield a sufficient return above inflation, ensuring that the real value of the cash flows is taken into account. Without this adjustment, the analysis may misrepresent the investment's performance and its attractiveness compared to other opportunities.

Other considerations like principal amounts, cash flows alone, or market risks do play a role in evaluating investments, but they do not adjust the value of those cash flows relative to changing economic conditions caused by inflation. Hence, factoring inflation rates is crucial for an accurate NPV assessment.