ACCA FM · Chapter 7 · Question 3 of 10
When using the real method of investment appraisal, which of the following is correct?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Cash flows expressed in current (time 0) prices are discounted at the real cost of capital
Explanation
The real and money methods give the same NPV if applied consistently: real cash flows (in today's prices) are discounted at the real rate, and money cash flows (including expected inflation) are discounted at the money rate. The real method is only practical when all cash flows inflate at the general rate of inflation.
More Investment appraisal with inflation and taxation MCQs
- Q5A company buys a machine for $80,000. Tax-allowable depreciation is available at 25% a year on a reducing balance basis. What is the…
- Q6A machine was bought for $120,000 at the start of year 1 and is sold for $30,000 at the end of year 3. Tax-allowable depreciation is 25%…
- Q7A company buys an asset for $60,000 at the start of year 1 (time 0) and claims tax-allowable depreciation at 25% reducing balance from…
- Q8A project is being appraised using the money method. Which of the following cash flows should NOT be adjusted for future inflation?
- Q9A project costs $200,000 at time 0 and generates pre-tax net cash inflows of $70,000 a year for 4 years, with no scrap value. Tax is 30%…