Mbappe, 18, has been linked with an exit from Monaco and Real Madrid have reportedly tabled a bid of £113million for the striker.
The Frenchman has maintained he would only leave France for first-team football, something many have doubted he would get straight away at the Bernabeu..
But Nicol says he would play Mbappe ahead of current No.9 Karim Benzema.
"I think he would start yes," he said on ESPN FC.
Real Madrid line-up next season with Kylian Mbappe Fri, May 5, 2017
Click through the gallery for a possible Real Madrid line-up next season with Kylian Mbappe
Play slideshow Getty Images 1 of 11
GK: Keylor Navas
Steve Nicol says Kylian Mbappe would start for Real Madrid ahead of Karim Benzema
Well I tell you what, Kylian Mbappe makes Real Madrid better straight away
Steve Nicol on Real Madrid target Kylian Mbappe
"Personally I would play him before Benzema, I don't see a problem with that whatsoever.
"The kid would make this team better, we've been asking ourselves since Real won the Champions League final at the weekend are they going to get any better?
"Well I tell you what, Kylian Mbappe makes them better straight away."
Get Quotes on Home Insurance
Steve Nicol and Shaka Hislop both agree Kylian Mbappe is better than Real Madrid star Karim Benzema
Former West Ham goalkeeper Shaka Hislop agrees with Nicol and reckons Mbappe is better than both Benzema and Alvaro Morata.
"I do agree and don't get me wrong, I thought Benzema was outstanding in the Champions League final," he said.
"But for the last two to three months leading up to that final, the discussion was whether Morata was a better option.
"Without question Mbappe is a better option than Morata, no doubt. As a result they can have a better option than Benzema as well."