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Hello sir, there is a simple question i want to ask, in fact i got confused between nominal and real terms, i know nominal is with inflation adjustment and real is without inflation adjstment. But on ‘investopedia’ a realiable and popular website i found it contradictory to my concept, and it was totally opposite. Upon my search through google it was same as investopedia saying. Now can u please clarify me, may b i m getting it wrong there, but i really got confused now. Thanks
I am not really interested in whatever investopedia says 🙂
The correct answer is what I teach in the lectures and what the examiner states in his answers.
Nominal cash flows are the actual cash flows (as adjusted where appropriate by inflation).
Real cash flows are the cash flows in the absence of inflation.Nominal cost of capital is the actual cost of capital.
Real cost of capital is what the cost of capital would be were there no inflation.
(The higher the expected inflation the higher the actual/nominal cost of capital will be).
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