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Is it true that if inflation increases in the economy we will have more cashflows in the future years which therefore increases the revenue & costs of a project BUT the purchasing power of the money would be lower.
So is that also true that when inflation increases in the economy government have to print more paper money in order for people to have more money in hand to buy the goods which is caused by the weakened purchase power of the money.
Your first paragraph is true.
As far as your second paragraph is concerned, the government does not have to print more money. Some governments choose to, but most do not because printing more money in itself increases the rate of inflation.
Sir, is it true that Fisher Model that is used to calculate discount factor (i.e. interest rate) has already taken inflation into account & when we discount yearly cashflows they are also discounted for inflation?
If cashflows are inflating at general rate of inflation which means that sales, variable cost & fixed cost all are inflating at the same general rate then real cashflows can be calculated by taking the net operating cashflows & divide them by general rate of inflation?
BUT if cashflows are inflation at specific rate of inflation which means that sales, variable cost & fixed cost are inflating at different rates so how do we calculate the real cashflows into this situation?
There was a past question where examiner has used this technique where all net operating cashflows were inflating at different rates (i.e. specific inflation) and to get the real cashflows he divide the nominal cashflows with the general inflation rate to get the real cashflows BUT is this correct way? You said in your lecture that is not possible in case where operating cashflows were inflated at different inflation rates!
Please explain!
You first two paragraphs are correct.
As far as the second two paragraphs are concerned the position is as follows.
If there are different rates of inflation then we always calculate the nominal cash flows (i.e. inflating to get the actual cash flows) and discount at the nominal/actual cost of capital. This is always the way we do it.
If (and only if) the question specifically asks you to also use the real cost of capital as well, then we take the nominal cash and ‘deflate’ them at the general rate of inflation (by dividing by the general inflation rate) and then discount at the real cost of capital.
The examiner has only asked for this second exercise (and frankly it is a ridiculous and meaningless thing for him to have asked) but in both cases the question asked for the nominal cash flows to be discounted at the actual cost of capital first,
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