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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.I 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 🙂 )
Good Morning Sir,Can you guide on a lecture to watch so I can get the distinction between a real and a nominal approach to the evaluation of an investment project under inflation as the one thing i picked in the above is one is inflated while the other is not
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