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Chapter 11
Dealing with inflation
Where cash flows have not been increased for expected inflation they
are known as current cash flows, or real cash flows.
Where cash flows have been increased for expected inflation they are
known as money cash flows, or nominal cash flows.
You can assume that cash flows in the exam are money cash flows,
unless the examiner specifies that the cash flows are in current terms.
(1 + r) = (1 + m)/(1 + i)
Where r = real rate of return i = inflation rate
m = money cost of capital (the company’s normal cost of capital)
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