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On part (b) you used 10% instead of 9.52% I understand it wont make much difference. But what if we used exactly 9.52 as a real discount rate.
For example
> 1×1.0952^-1
> 1×1.0952^-2
> 1×1.0952^-3and then multiply those 3 rates with 60,000. I understand it will be a bit slow process but would this be also correct? Im getting 30,480 Positive NPV which seems fine.
also would like to notify you, there was no example on general inflation where there are 2 different inflation rates and we use a general inflation rate to arrive at real net cash flows from nominal. We can arrive at real cash flows from nominal, without using general inflation too like we did in example 6 but I didn’t know we can use general inflation as well to arrive until I struggled almost half hour on general inflation in a question on npv june attempt 2019.
For your first question, it is more correct to use 9.52%. However I use 10% simply because in the exam it is extremely rare for you to ever be expected to use ‘unusual’ rates and the examiner expects you to use the table and so use the nearest %.
For your second question, I do explain that it is the general rate of inflation that determines the nominal cost of capital. Therefore it is the general rate of inflation that is used to convert the nominal cash flows into the real cash flows. I know that I do not do an example on the second bit and I will add one (although it was nonsense of the examiner to ask this, since it is of no practical relevance whatsoever, and I have written to the examiner stating this 🙂 )
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