Npv with inflation

MR John, I am having difficulty in interpreting this question as well as understanding the solution Mr Gable has just received a dividend of $1,000 on his shareholding in Gonwithy Windmills. The market value of the shares is $8,000 ex div. What is the (nominal) cost of the equity capital, if dividends are expected to rise because of inflation by 10% in years 1, 2 and 3, before levelling off at this year 3 amount? Solution The nominal cost of equity capital is the internal rate of return of the following cash IRR is 16% Solution Year. CF PV@15%. PV@20% 0 (8,000) 1.000 (8,000). 1.000. (8000) 1 1,100 0.870 957 0.833. 916 2 1,210 0.756 915. 0.694. 840 3-*. 1,331 pa 5.041 6,709. 3.472. 4621 NPV 581. NPV (1623) The IRR is 16% * The present value factor = (Factor 1 – ) – (Factor yrs 1-2). For 15% PV factor: 1/0.15 - 1.626 =5041 For 20% PV factor: 1/0.2 - 1.528 = 3.472 Why is IRR = money cost of capital? Why is it there a different calculation in the PV factor? Perpetuity should be 1/r, why the perpetuity calculation is diff for year 3?