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Question:Grass Co is considering a project and predicts:
(i) that wage rates paid to the necessary skilled labour will rise by 7% per year,
(ii) that the annual increase in inflation will be 12%,
(iii) that the company's money/nominal cost of capital is 24%.
What is the appropriate discount rate to apply to discount the project's net cash flows in calculating the NPV?
A. 24%
B. 13%
C. 12%
D. 7%
The correct answer is: 24%.
Remember, we must always discount amounts expressed in actual (money/nominal) terms at money/nominal discount rates.
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