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Hi Dear tutor, in part b I calculated cash flows without inflation because of real terms plus i used real cost of capital. Do we always ignore inflation when using real cost of capital?
Yes.
We either discount the nominal (actual) cash flows at the nominal (actual) cost of capital (and this is the approach for most exam questions), or alternatively (but only if asked) we discount the real cash flows (the flows with inflation removed) at the real cost of capital.
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