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If we’re only given an inflation rate per annum and no specific rates for the cash flows, do we ignore inflating the cash flows and instead discount at the actual cost of capital? Also is the money cost of capital the same as actual cost of capital?
You would ignore the inflation of the cash flows and discount at the real cost of capital (not the actual (money) cost of capital).
You would calculate the real cost of capital by using the Fisher formula that is provided in the exam.
I do explain this towards the end of my free lectures on investment appraisal with inflation.
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