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Hello John,
Could you explain why is the difference as real and money cost
– In you lectures, you’ve said that real cost ignores inflation and money does includes an allowance for inflation but both gives the same answer.Thanks
The real cash flows are the nominal cash flows with the general rate of inflation removed.Discounting the nominal flows at the nominal cost of capital will give the same result as discounting the real flows at the real cost of capital (although we only do it the second way if the question specifically asks for it, or if it is a perpetuity).
Hello John,
Thank you for your answer.
Why do we need both of them if they give the same answer?Thanks
We don’t unless the question asks for both (as one past exam question did).
Dear Sir
I think since tax benefit from TAD is not affected by inflation, NPV resulted by 2 approach will be different ?
Thank youNo it will not be different. If the general inflation is removed from the nominal flows (including the tax flows) and these real flows are then discounted at the real cost of capital, the result will be the same.
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