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Hi,
For part (a)(ii), I have just noticed that both the ACCA website past year papers and BPP revision kit give different answers for the real NPV.
ACCA website answer:
Real NPV is $33 722
Nominal NPV is $33 347The answer deflated the NOMINAL CASH FLOWS “BEFORE” TAX by the general inflation rate
BPP revision kit answer:
Real NPV is $33 348
Nominal NPV is $33 347The answer deflated the NOMINAL CASH FLOWS “AFTER” TAX by the general inflation rate
Question:
My question is which method should I follow and which is the correct method to use?Strictly the BPP answer is more correct (and is faster) so use that approach.
Either approach would have got full marks.
Does that mean there is no “fixed” rule about which cash flows to be deflated?
Yes. To be honest, although the examiner has asked for this twice in the exam it is a rather silly thing for him to ask.
That is why in almost all questions we simply discount the nominal flows at the nominal cost of capital. We only deflate and use the real cost of capital if the question specifically asks for it, in which case as I wrote, the BPP answer is more correct but either would be allowed.
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