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Forums › ACCA Forums › ACCA AFM Advanced Financial Management Forums › Real and nominal (money) discount rate
i know that nominal (money) amount is already adjusted with inflation
and real means the actual amount that is to be received or pay in actual amount without inflation
My question is: how do we know that Ko is to be adjusted for inflation or not ?
What to do, if:
amount is given as nominal amount and ko is silent about real or nominal?
question silent about amount but says Ko rate is actual , nomial or real?
till now the concept i know is that, if i deposited $1 in bank @7% for 1 year and inflation is 4%, then interest of 7p i received is actually 2.9p (1.07/1.04).
But i always got confused how i apply or not apply inflation in question.
Does examiner asked us to calculate amount without taking into account inflation (though they use to say that exam will be in real environment)
It should depend on the question. For example, let say that the question state that the revenue and cost will increase according to inflation rate, then we don’t have to recalculate the revenue & cost for every year, but instead discount it using real rate.
If the increase of items in cash flow are variable, it is better to use money(nominal) rate as the discount factor
Thanks
Now i got it.