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Good morning, let me just first say how helpful Open Tuition has been in my ACCA journey! I am very grateful for all the resources and support you (John) and your team are providing us with. Now, my question is: if a question states that’s all values are given in nominal terms, does this mean thy have been adjusted for inflation or not? I’ve seen your videos where you call nominal values using a term ‘actual’ values and therefore adjusted for inflation. Even the technical article on ACCA website International project appraisal states that Nominal means adjusted for inflation. However, when I look into any other financial articles online, they all say Nominal value is unadjusted. Real value is a value adjusted for inflation. This is confusing. In an AFM exam may I assume nominal means adjusted? I will really appreciate your feedback. Many thanks. Kate.
Thank you for your comments 🙂
All of the sources you refer to are correct – the problem is your use of the word ‘adjusted’.
In NPV calculations we need the actual cash flows – these are the nominal cash flows.
Usually in exam questions we are given the cash flow at current prices and these are the real cash flows, so we apply inflation to them in order to arrive at the actual/nominal cash flows.The reason the other financial articles you refer to state what they do is because they are using the same ‘rule’ but are referring not to NPV calculations but to something else. For example, suppose your salary last year was $1000 and this year is $1100. These are your actual / nominal salaries. So it seems that you have had a 10% increase. However if it is the case the inflation during the year is 6% then in real terms your salary has not really increased by 10% but by less (because everything you spend your salary on has increased by 6%). So to make a fairer comparison you would remove the inflation from this years salary in order to express it in real terms.
So all are doing the same thing. In exams we add on the inflation to the real cash flows in order to get the actual/nominal flows.
In the articles they are doing the same thing but the other way round – they are removing the inflation from the actual/nominal flows in order to arrive at the real flows.
I hope that helps 🙂
Thanks so much, this definitely helps 🙂 It all makes sense now.
Appreciate your time taken to explain it. I’m sure you have a very busy week!
Best wishes, Kate
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