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Dear Sir
Question 71 in section A of the above is:
Data of relevance to the evaluation of a particular projekt are given below:cost of capital in Real time : 10% per annum
Expectet inflation :8%per annum, Expected increase in the project’s annual cash flow:6% per annum,Expected increase in the project’s annual cash flow : 4% per annum
Which one of the following seta of adjustments will lead to the correct NPN being calculated?
The answer is B :
Cash inflow :6% p.a. increase
Cash outflow 4% p.a. Increase
Discount percentage :18.8%Please can you explain why?
As I explain in my free lectures on investment appraisal with inflation, we discount the nominal/actual cash flows at the nominal/actual cost of capital.
To get the actual cash flows we inflate them at whatever rate of inflation applies to the flows.
To get the actual cost of capital we use the Fisher formula that is given in the exam (as again I do explain in my lectures).
(I do also suggest that you buy a current edition of the Revision Kit because there have see syllabus changes since 2016! )
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