CFA Practice Question

There are 151 practice questions for this study session.

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.

A. 60,500.
B. 50,000.
C. 55,000.
Correct Answer: C

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.
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