- CFA Exams
- CFA Exam: Level II 2021
- Study Session 7. Corporate Finance (1)
- Reading 19. Capital Budgeting
- Subject 1. Cash flow projections

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**CFA Practice Question**

Real cash flow occurring in year 2 is 50,000. If the inflation rate is 10% per year, calculate nominal cash flow for year 2.

B. 50,000.

C. 55,000.

A. 60,500.

B. 50,000.

C. 55,000.

Correct Answer: C

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**User Contributed Comments**
11

User |
Comment |
---|---|

kalps |
(50,000 * 110/100)*1.1= 60,500 |

danlan |
We should calculate only one year, i.e: 50000*1.1=55000 |

sarath |
Nominal rate takes into account the inflation rate so nominal cash flow will be more than real cash flow by the inflation percentage... |

noonah |
Further to danlan comment, we start at year 1, rather than year 0,and that is why it is only one period compounding, rather than two. Exam questions often play on this potential confusion. |

noonah |
Pls ignore previous comment on two-period compounding. It is like sarath said, nominal CF=real CF * inflation rate |

jd2442424 |
I still don't get why the inflation rate per year is only applied once. |

vi2009 |
nominal rates = (1+i)*(1+real rate) |

VenkatB |
jd2442424: I also missed this one.. Real cashflow in any year * Inflation rate = Nominal cash flow in that year. The answer is not dependent on when it is received. (It is not like the Future value of the current amount) |

shash0678 |
I believe since cash flows are received at the end of the year, the first year CF does not consider inflation impacts, and the second year's CF is impacted by inflation for one period. Good question though ... |

jimmyvo |
Real cash flow (inflation adjusted) < Nominal Cash flow "C" is the only answer that's higher than stated real cash flow of $50k |

jimmyvo |
Never mind my answer. I'm on some kind of drug. I didn't acknowledge "A". Haaa. |