I don’t have my books with me currently but a friend of mine asked me this question and I didn’t have an answer. Anybody have any thoughts? Question #1. nominal rate = 14% real rate = 8% PV nom (@8%) = 16.75 PV real (@14%) = 12.25 PV nom (@ 8%) = 23.78 What is the present value of the real cash flow @ 8%? A) 12.25 B) 14.06 C) 16.75 D) 23.78 Answer says nominal is discounted at nominal rate real is discounted at real rate and that C is the correct answer. Logically, A and D can be eliminated but absent any other information, how can you determine whether to select B or C? Thanks, -J
C) The nominal cash flows discounted at the nominal rate should be equal to the real cash flows discounted at the real rate. Answer from book.