Dec 2008 no i (i)

The way it is calculated is as follows:

Property prices are rising at 8% pa in real terms. There is general inflation of 2.5% p.a. and so the actual price increase will be (1.08 x 1.025) – 1 = 10.7%

There is 5 years inflation, and so the value of the property will be:
6.2M x (1.107)^5 = 10306941

There is to be a charge for repairs and renewals of 1.2M at current prices.
So this will inflate at the general rate of inflation of 2.5%, and because it is at current prices there will be 6 years inflation.

This gives an actual cash flow of 1.2M x (1.025)^6 = 1391632

So….the net actual (nominal) cash flow is 10306941 – 1391632 = 8915309.

Hope that helps! (It was bad of the examiner not to show the workings. BPP’s answer is different for just that bit, but there’s is wrong!)