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Sir in this question real cost of capital is used in calculating the net present value in part a
Do we have to always use real cost of capital in the exam if NPV arises ?If there is inflation then generally there is a choice as to how to calculate an an NPV.
1 Inflate all flows and discount at the money (nominal ) discount rate
2 Keep all flows in current terms (ie Time 0) and discount at the real rate.As, here, amounts are given in current terms, and there is a Method 2 is faster – especially as the real rate is a nice round 11% so the discount factor is available in the tables.
The long alternative would be to inflate each cash flow, including tax, and then discount at 15.44%.
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