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Forums › ACCA Forums › ACCA AFM Advanced Financial Management Forums › Inflation
Question # 1, Dec/08 (Blipton Int.).
Could anyone tell me why the Revenue was not inflated by inflation rate but Cost of capital was used as nominal cost of capital.
Hi Nazrul5,
All information except for the cost of capital is given in nominal terms. In short:
1. Revenue,costs,etc – Nominal Cash flow
2. Cost of Capital – Real Value.
The rule is thus: use real cost of capital for real cash flows or use nominal cost of capital for nominal cash flows.
(The Nominal Cost of capital incorporates inflation)
To solve the question:
A] Convert all cash flows to real value (long process) then use REAL COST OF
CAPITAL
B] Use Nominal cash flows and change real to nominal (WACC) – Recommended
Hope this helps
Hi. Concerning this question (Blipton) can someone please explain how the nominal project operating cash flows was derived from the real project operating cash flows for the different years. I’m stuck on this. Please help.