How do you distinguish a nominal vs. a real DCF — and which should you use?

Two variants of the DCF, depending on how inflation is handled:

• Nominal DCF: FCFs and WACC include inflation. The IB standard — cash flows grow with around 2% inflation plus real growth.
• Real DCF: FCFs and WACC are inflation-adjusted. Convert via the Fisher formula:

```
WACC_real = (1 + WACC_nom) / (1 + Inflation) − 1
```

Theoretically identical; in practice the nominal method is simpler — forecasts (revenue, margins, capex) are typically set in nominal terms.

• Hyperinflationary markets (Argentina, Turkey in the 2020s) — otherwise nominal forecasts get absurdly high.
• Long-term infrastructure (50+ year concessions).

nominal.