Hi Sir,
I am bit confused with the difference between the real and nominal terms taken from the Fisher Equation. The latest Examiner's Report 2015 stated real and nominal terms approach both include inflation in different ways. I was led to think that real term ignores inflation while nominal includes inflation. I also looked at June 2010 paper which has the same thought process as me . Please clarify.
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Real term and Nominal term to Investment Appraisal
10y ago#1I know why you are saying this, but what the examiner has said is correct.
The nominal terms approach obviously (I hope) includes inflation because we inflate all the cash flows to get the actual cash flows.
With the real approach, although we do not inflate the cash flows, we deal with the inflation by removing it from the nominal cost of capital to get the real cost of capital.
(It would have been better if the examiners had said that neither method ignores inflation, which is what he meant :-) )
Thank you so much.
10y ago#3You are welcome :-)
5y ago#6It is covered in the lectures on investment appraisal with inflation (although the lectures are a complete free course for Paper FM and need to be watched in chapter order).
Your second post could not be more wrong, as is explained in my lectures!!!
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