From reading prior posts and the hints in the text, it sounds like drawing a clear distinction btw the two is a common source of confusion and frustration when doing constructive responses. So without further adu, does anyone know or understand how to distinguish when when you’re dealing with a real number or nominal value (and I realize one is with inflation; the other not) ?? Also, is required return in real or nominal terms? For example, I would tend to think that living expenses (and dollar values in general) reflect inflation but many IPS refer to the necessary amount for living expenses as a real amount. Or they’ll refer to a portfolio amount as nominal but the living expenses it generates as real. Anyone had a clear understanding of identifying the two? Many thanks!!
Don’t confuse yourself, no given cash flow is in real or nominal terms per se. If a distinction is made in the text of a question then you need to pay attention and classify Cash Flows into the two groups. If a distinction is made it will either be completely clear so no problem, or it will say that a given cash flow does or does not take account of inflation in which case it is real (which takes into account or adjusts for inflation) or nominal respectively (which ignores the effects of inflation). Then be sure to use calculus on CFs in the same bucket only and to use the real or nominal discount rate respectively.
Agree with Penny-wenny, it will should be given on question whether to use Nominal or Real CFs. The expenses which include inflation are Nominal in nature.
Unless they tell you otherwise, assume that the values are nominal, just as they are in the real (sorry) world.
CFA Institute will tell you, explicitly, when the numbers are real instead of nominal.