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Dear Sir
I am getting confused with the basics: Q26 Burunga..
If i must increase the sales and costs with inflation rates provided then i must use nominal rates? i thought the nominal rate made up for the inflation and therefore you did not need to add it to the sale or cost. In other words i thought if I was adding the inflation amount then the real rate was used. In other words they are giving you the figure. What is the rule?You discount the nominal (actual) cash flows at the nominal (actual) cost of capital.
(You only use the real rate if discounting the current price cash flows i.e. the flows ignoring inflation – this is only relevant when discounting inflating perpetuities)
It will help you to watch the PM (old F9) lectures on investment appraisal with inflation because this is revision of Paper PM – I explain how and why, with examples.
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