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Can I just discount the real cash flows at the real discount rate? There was no reference to it that it would be right in the answers. Will I still get the full marks for it?
No you would get full marks, because different flows are inflating at different rates.
There is no choice but to calculate the nominal cash flows and then discount at the nominal cost of capital.
Can’t believe I forgot that. Thanks again for the explanation.
P.S there is a typo in your answer. You said I would get the full marks :P.
Hi,
Sorry to jump in on this question.
If the question gave the nominal and also the general rate of inflation could you discount at the real rate?
Also, I am correct in saying that if I was to discount at the real rate I would need to inflate at the nominal and then deflate using the the real rate?
Thanks
GrahamYou could only discount at the real rate if first calculated the nominal cash flows (inflating at the rates even for each component) and then deflated the flows at the general rate of inflation.
The only time to ever do that is if the examiner specifically asks you to (which is rare, but has happened twice in the exam). Otherwise it is not expected and is wasting time.
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