Inflation is 2% per year; the interest rate is 8% per year. Your perpetuity project has cash flows that grow at 1% faster than inflation forever, starting with $20 next year.
(a) What is the real interest rate, both accurate and approximate?
(b) What is the correct project PV?
(c) What would you get if you grew a perpetuity project of $20 by the real growth rate of 1%, and then discounted it at the nominal cost of capital?
(d) What would you get if you grew a perpetuity project of $20 by the nominal growth rate of 3%, and then discounted it at the real cost of capital? Performing either of the latter two calculations is not an uncommon mistake in practice.