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Hello john, lets say a perpetuity is starting in 2 years time at $10,000 but is increasing due to inflation, when doing the present value calculation would the nominal or real rate be used? Also in what situations would the real rate be used ? I know the nominal rate is used usually in a present value calculation.
In almost every exam question we discount the actual (nominal) cash flows at the actual (nominal) cost of capital.
The only exceptions in the exam are (obviously) if you are told specifically to use the real flows and the real cost of capital (which has happened once); and if you have an inflating perpetuity (which has never happened in the exam, but could because of the MCQ’s)
If it is an inflating perpetuity then it is not possible to list the actual (nominal) cash flows and so there is no choice but to apply the real cost of capital to the current price flow.
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