ACCA · Question 06 · Investment Appraisal
'AstroTour', a space tourism startup, is appraising a 10-year project. The company expects general inflation to be 4% per year. The real cost of capital is 8%.
If AstroTour decides to discount the project's cash flows using the nominal (money) cost of capital, how must the cash flows be treated to ensure a correct Net Present Value (NPV) calculation?
Answer options:
The cash flows must be expressed in current, uninflated terms.
The cash flows must include the effects of specific inflation.
The cash flows must be discounted by the real rate first, then inflated.
The cash flows must exclude tax effects, as tax is a real cash flow.
32 questions · hints · full answers · grading
Expert