Nominal vs real cash flows--which is better?

CFA Level II
#1

Capital budgeting section talks about how inflation can lower profits and tax savings on a project, so since nominal cash flows incorporiate inflation, are they a better measure to use? Or is real better to use because it gives you the profitiablity without the added “noise” of inflation? Thanks.

#2

i feel that it doesn’t matter. in equity valuation, they basically say that valuations prices for nominal and real both will be the same in the end, and then they go on to say that it all depends on how good the analyst’s assumptions are. so, i feel that the answer to your question depends on what CFAI “exactly” asks you in the exam. i doubt they will ask a broad question like “is nominal better than real cash flows”, and not include an answer choice that says “it depends” HTH

#3

niraj_a Wrote: ------------------------------------------------------- > i feel that it doesn’t matter. > > in equity valuation, they basically say that > valuations prices for nominal and real both will > be the same in the end, and then they go on to say > that it all depends on how good the analyst’s > assumptions are. > > so, i feel that the answer to your question > depends on what CFAI “exactly” asks you in the > exam. i doubt they will ask a broad question like > “is nominal better than real cash flows”, and not > include an answer choice that says “it depends” > > HTH +1

#4

well the econ section kind of bashed on nominal interest rates, saying that nominal rate increases mean inflation has gone up and all investors look at real rates of return (in fact the assumption in econ is that only real rates matter and that real rates in alll parts of the world are equal). thus, i was trying to see if a simimlar reasoning can be used here…

#5

For valuation purposes it shouldn’t matter, but for analytical purposes I think it’s better to see the adjusted CF

#6

adjusted CF meaning real?

#7

For valuation, if you use nominal cashflows than you must discounted at nominal discount rates and if you use real cashflows, then you must discount in real discount rates. It does not matter which, as long as you don’t mix and match