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Hi sir,
If qstn gives asked to find real rate method by giving more than one inflation value in the qstn. We use inflate cashflow to money cash flow and than deflate them at general rate of information. This thing I know just in theory but how to apply in calculation. I don’t understand How to inflate and deflate when they give more than one inflation rate. Can you plz explain me by giving some short example. Thanks in advance.
I work through an example inflating the flows at different inflation rates in my free lectures on investment appraisal with inflation.
If the question then requires you to calculate the real cash flows (as has happened twice in the exam), then you take the money flows already calculated and deflate them at the general rate of inflation.
So if, for example, the general inflation rate is 3% per year, we take the money/nominal flow at time 1 and divide by 1.03 to get the real cash flow. We take the money/nominal flow at time 2 and divide by 1.03^2 to get the real cash flow, and so on.
Thank you so much sir really appreciate you. I see first time this type of practice platform in which tutors reply immediately. Thank you for helping us to pass?
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