INFLATION AND CAPITAL BUDGETING (Tables) Homework Help

TABLE

Real Cash Flows

a.  Based on interpolation as per Table.
b.  Difference in NPV of Rs 73 (Rs 3.28,073 – Rs 3,28.000) between the two discount rates (nominal and real) is on account of rounding off the values. Both the approaches provide the same answer.

It is important to note that real cash flows discounted at the real discount rate yield a identical amount of NPV that is obtained by discounting nominal cash flows by the nominal discount rate. When estimates of CFAT and cost of capital include inflation, they are said to expressed in nominal, when such estimates exclude the impact of inflation. They are said to be shown in for correct analysis, these estimates should either be stated in nominal real terms. It implies that capital budgeting decisions should either reckon the inflation factor CFAT, as well as the cost of capital, or exclude it completely.

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