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Its Question 72 BPP kit.
Model answer calculates the real rate of return in part b(ii).
I just want to ask is it calculating it by choice or do we had to calculate the real rate of return in this case and was inflation rate given a clue to it ?
Thank you sir and also if you have recorder any lecture on this topic. ThanksRelated to same question as above part b ii. The develpoment costs are being discounted at 12% which is the nominal Cost of capital and the cash inflows after the development costsare discounted at the real rate of return. Is there no any other way round for this problem can we also inflate the individual cash flows for each years and discount them at 12%. Will that process give the same result. Thanks you sir
I think you are really referring to part b(i) (part b(ii) has no calculations 🙂 )
We always either discount the nominal (actual) cash flows at the nominal (actual) cost of capital, or alternatively discount the real (current price) cash flows at the real cost of capital.
Here, the question specifically gives the cash flows at today’s prices (i.e. current prices) and therefore we discount at the real return.This is explained in the Paper F9 lectures on investment appraisal with inflation (because it is revision of F9).
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