Net Present Value in Nominal Terms I have the following question from my homework:

When calculating the net present value of an investment project, the firm of Henry &amp; Norman expects profit in the first year to be $60,000, and they expect real profits to remain at that level over the next five years.
Since they are using nominal discount rate of 11 percent in their net present value calculation, they want to convert future real profits to nominal profits.  They expect inflation to be 4 percent per year over the next five years.
The nominal profit for year 2 of the investment project is ___________(correct answer, 62,400)
If the investment project has an initial cost of 200,000, the net present value in nominal dollars is _________  (my answer 64,474.50  book answer 38,264.90)

The difference between the book answer and my answer is that I used 60,000 as year 1 profit with no discount.  I realized this was incorrect according to the given methodology in my textbook of $NPV=-C+\pi_1/(1+R)+\pi_2/(1+R)^2+...$
What I don't understand is why we discount the profits in year one but don't consider inflation in year one.  This seems inconsistent to me.  Why do we discount the real profit in the first year and not the nominal profit, or if we assume nominal profits in year one are the same as real profit, why do we discount in year one?
What I don't understand is why we discount the profits in year one but
  don't consider inflation in year one. This seems inconsistent to me.
  Why do we discount the real profit in the first year and not the
  nominal profit, or if we assume nominal profits in year one are the
  same as real profit, why do we discount in year one?


As you said, the firm


  expects profit in the first year to be $60,000, and they expect real profits to remain at that level over the next five years.


They are expecting both real and nominal profits (because they do not explicitly state only one or the other) to be \$60,000 for year one but they need to calculate NPV for $T_0$, thus they need to discount the \$60,000 for a single year (and the others for an additional year).

We're realizing the profit as income starting in $T_1$, and realizing the initial capital expenditure at time $T_0$.

$T_0$----------$T_1$--------$T_2$--------$T_3$--------$T_4$--------$T_5$
-200000 + 60000 + 60000 + 60000 + 60000 + 60000 Real
-200000 + 60000 + 62400 + 64896 + 67492 + 70192 Nominal
-200000 + 54054 + 50645 + 47451 + 47451 + 41655 Nominal Discounted  

Calculated in Python:

&gt;&gt;&gt; -200000 + sum(60000 * (1.04**i) / (1.11**(i+1)) for i in range(5))
38264.90224378838


As to the reason the authors of the question gave these conditions, I presume that they want to ensure that you can quickly arrive at the correct calculations based on seemingly trivial but important details. I recall a similar trick in a corporate finance final, where a careful reading of the question indicated that a speedy reading of the question (one that I initially made and expected most of my peers would make) would result in an off-by-one time period mistake.