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Hello Sir,
I asked this question yesterday u said you were in travel. Its a-iii, sensitivity analysis and measuring changes in decommissioning costs before npv becomes zero why do we have to calculate the real discount rate for it and why do we apply GDP growth of 4% in the formula instead of inflation rate of 2%. Do you have any lecture on this particular topic which you can refer,please . Thank YouYou have the choice always of either discounting the nominal (actual) cash flows at the nominal (actual) cost of capital, or discount the real cash flows (the current price flows ignoring inflation) at the real cost of capital.
Although more often we do it the first way, here it would take a lot longer because it is for 30 years.This is revision of Paper F9 and so although in the Paper F9 lectures it is explained in full (n the lectures on relevant cash flows for investment appraisal), there is no specific P4 lectures (but I do deal with it in the course of working through an example in the P4 lectures on investment appraisal).
The reason for using 4% is that the question specifically says that decommissioning costs will rise in line with GDP growth (which is 4% per the question).
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