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kaplan kit 89, why have they used nominal approach?

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › kaplan kit 89, why have they used nominal approach?

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • March 2, 2021 at 6:12 am #612508
    draiells
    • Topics: 123
    • Replies: 141
    • ☆☆☆

    Hello can you help me point out where is it indicated that we use nominal approach as the answer in kaplan has done wo the following question:

    ”Spotty Ltd plans to purchase a machine costing $18,000 to save labour costs. Labour
    savings would be $9,000 in the first year and labour rates in the second year will increase
    by 10%. The estimated average annual rate of inflation is 8% and the company’s real cost of
    capital is estimated at 12%. The machine has a two year life with an estimated actual
    salvage value of £5,000 receivable at the end of year 2. All cash flows occur at the year end.
    What is the negative NPV (to the nearest $10) of the proposed investment? ”

    March 2, 2021 at 9:25 am #612559
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49601
    • ☆☆☆☆☆

    We always discount the nominal cash flows at the nominal cost of capital unless the question specifically says to do differently.

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