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Hi Im working through Q4a) the sales price increases by 4.2% per year –
For year 2 the inflated sale price is £27.14, the answer book shows for year 3 the inflated sales price is £29.42 – can you please confirm how they got to this answer? (same for year 4 inflated sale price £31.83).At time 2, the price at current prices is $25.
However there will have been 2 years inflation at 4.2% and so the actual price will be 25 x 1.042^2 = $27.14
Similarly, at time 3, because there will be 3 years inflation the actual price will be 26 x 1.042^3 = $29.42I really suggest that you watch our free lectures on investment appraisal with inflation – this is asked very very often in the exam.
Our free lectures are a complete course for Paper F9 and cover everything needed to be able to pass the exam well.
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