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- June 4, 2020 at 9:17 am
Hi Dear tutor, I have a question.
Sales revenue —37500
fixed cost ——–(3000)
cash flow before tax –13200
it has differently been showed in the answer. why? if it asks real net present value then we do not consider inflation of sales variable and fixed cost.
Thanks in advanceJune 4, 2020 at 9:38 am
Nominal NPV uses the actual cash flows and discounts at the actual cost of capital.
Real NPV used the cash flows with inflation removed and discounts at the cost of capital with inflation removed (the real cost of capital).June 4, 2020 at 10:56 am
Then in the question first year real cash flow before tax is 13643 and my calculation without inflation is 13200.with nominal npv i have to inflate all cash flows such as sales revenue, variable cost and fixed cost as well as working capital if required.
I ignored inflation in part b and used real cost of capital and i see there is difference between cash flows given in the answer and cash flows in my calculationJune 4, 2020 at 3:37 pm
The nominal cash flow in the first year is 14,148.
The general rate of inflation is 3.7%.
Therefore the real cash flow is 14,148 / 1.037 = 13,643
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