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Hello,
Pls I’m having a challenge with how the money rate was calculated for the Return Phase Cash Flows.
Money rate is calculated as follows
m+1=(r+1)(i+1)-1
From question
m = (1.025*1.08)-1
m=.107When i multiple by net ‘real’ CF in year 2010, I get 57,564 but the answers in exam kit says 54,633.
I’m not sure how I’m getting it wrong cos I really think I’ve done the right thing.
Kindly assist with clarification.
Thank you.
I don’t know which exam kit you are using (I only have the BPP one).
They may have amended the original question, but in the examiners answer to the original question, the only 54,633 is the net nominal cash flow in 2010. For calculating this it is simply a question of inflating the real cash flows of 52,000 by the rate of inflation in the UK of 2.5%. 52,000 x 1.025^2 = 54,633.The money/nominal discount rate is only relevant when we actually come to discount.
Since the Dubai inflation rate is 4.8% and the real cost of capital is 4.2%, then the nominal discount rate is (1.048) x (1.042) – 1 = 0.092016 or 9.216%
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