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Q- 298- Pinks co (Mar/June – 2019)
in this question, first they asked to calculate npv at nominal rate
value given in qs is without inflation and current time rate.
sales price inf- 5%, vc inf- 3.5% , fx cost inf – 6%, general inflation- 3.7%in second qs they ask us to calculate same thing at real rate.
as per my understanding real rate is rate without adding inflation.
in ans given back,
what they have done is they calculated first question, from that whatever the operating profit value comes, they deflated it with general inflation, in qs two.why don’t they use value already given in current time rate.
and for once ok its fine they deflated that figure. but why whole operating profit with general inflation and not with selling cost with selling inf and vc with vc inflation and fixed cost with fixed cost inflation.please help in this concept
Real Rate Definition:
The real rate is the nominal rate adjusted for general inflation. By deflating the nominal cash flows using the general inflation rate, you align the cash flows with the real rate, which is inherently adjusted for general inflation.
So for nominal NPV you inflate individual cash flow components using specific inflation rates and discount at the nominal rate.
For R
For real NPV you deflate the nominal operating profit using the general inflation rate and discount at the real rate.
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