- This topic has 5 replies, 2 voices, and was last updated 10 years ago by
.
- Posts
The life of the project is 3 years
The selling price of a product is $20 p.u.
The company is expected to increase the selling price by 7% p.a.My Question is when does this price be effective,
My understanding is that first year the selling price will be $20, second year $20*1.07 and third year it should be $20*(1.07)(1.07).
Am I right ?I watched a lecture for Example 5 (Chapter 8 Relevant Cash Flows for DCF) where the cash inflow is inflated in first year, but I think for the first year the company will be selling at price “X”, that meas without inflation and at the end of year the cash inflow should be “X” multiplied by number of units sold.
It depends on the wording of the question.
Some questions say that the selling price will be $20 in the first year and will then inflate at 7% (in which case it is as you have written above).
Other questions say it is $20 at current prices, in which case it inflates in the first year.
This is what it says in Example 5, and to the inflow at time 1 is 20 x 1.07.
(If you watch the whole of the lecture then I do stress this point and explain it)
Thanks for your response.
By this I understand that if selling price is mention that it’s current price we will multiple the s.p with inflation rate for time 1 else we will take it as it is given (without inflation) for time 1.Do we follow same steps for Labour and Material?
Thanks,
Kawalpreet SinghYes – it is the same rule for expenses.s
If you are told that they are the costs in the first year, then they only inflate in the second year. However, if you are told that they are at ‘current prices’ then you inflate them in the first year.
Example 4 in our lecture notes is a good example of both wordings (but watch the lecture that goes with it, where I go through the example and also explain the reasoning behind it).
(I hope you realise that the notes are not for using on their own – they are what are used in the lectures)Yes I agee with your point…i always refer to lectures not only notes as your explanation towards cocepts is very good.
I refer to your lecture and pass F8 in June.
However I did not find lecture for example 4, we only have a lecture for example 5 i guess.
Thanks
I don’t know where you were looking, but this is the link to the lecture:
https://opentuition.com/acca/f9/relevant-cash-flows-for-dcf-inflation/
- You must be logged in to reply to this topic.