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Inflating cash flows

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Inflating cash flows

  • This topic has 1 reply, 2 voices, and was last updated 2 years ago by John Moffat.
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  • January 22, 2021 at 6:04 pm #607591
    ilham9089
    Member
    • Topics: 236
    • Replies: 171
    • ☆☆☆

    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?

    January 23, 2021 at 9:41 am #607629
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51571
    • ☆☆☆☆☆

    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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