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How fo i know which discount rate to to use in discounting cash flowswith inflation .nominal or real? And why?
I don’t think you have watched the free lectures on this!!
There are two choices that in theory give the same result.
You either discount the nominal (actual) cash flows at the nominal (actual) cost of capital, or you discount the real cash flows (i.e. without inflation) at the real cost of capital (i.e. without inflation).
In theory they both give the same result, because in theory inflation rates and interest rates move together. However this only works if everything inflates at the same rate.
In the exam you always take the first option (discount nominal flows at the nominal cost of capital), unless the question specifically tells you to take the other option.
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