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