Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › nominal and real interest rate

- This topic has 1 reply, 2 voices, and was last updated 2 years ago by John Moffat.

- AuthorPosts
- November 3, 2020 at 2:32 am #593891
sir

i have read the technical article for FM, but i fear will misunderstand it meaningeg. the question provide cash flow yearly $100, coc (even though the question didnt mention the coc is nominal or real, but we will assume it is nominal) the question also provide specific inflation and general inflation. so in order to calculate the NPV , which question didnt mention on whether wan real or nominal, we will usually inflated the $100 using specific inflation, and the discount the coc ( which usually is nominal coc).

refering to above question, if question want real npv, we will inflate the cash flow $100 to inflated cash flow using specific inflation, after that, discount the cash flow to real cash flow by using general inflation. eventually calculate the real npv by discounting real coc.

alternative way of real npv, can i just calculate the real npv by just discount $ 100 ( without inflate it) and discount it real coc ?kindly give me some guideline if i have make wrong method

November 3, 2020 at 10:17 am #593924What you have written is correct except for the last line – you can only discount the real cash flows (without inflation) at the real cost of capital if the inflation for the cash flows is the same as the general rate of inflation.

- AuthorPosts

- You must be logged in to reply to this topic.