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Hi Sir,
I was working on few illustrations from the Kaplan study text where the requirement was to calculate NPV by considering inflation.
The question also mentioned the inflation rates for revenue and cost items which had different inflation rates.
So this must be solved by identifying the nominal interest rate.
However the last line of the question says “All cash flows are in real terms” – Please explain this.
It means that the cash flows are given before taking into account inflation.
So we need to find the nominal cash flows – i.e. the actual cash flows after accounting for inflation, and then discount at the nominal cost of capital – i.e. the actual cost of capital.
It will help you to watch our free Paper FM lectures on investment appraisal with inflation, because this is revision from Paper FM and the terms used and the methods needed are explained in the lectures.
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