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Dear sir,
Perhaps it’s silly question to answer, but I am struggling to get a answer for myself.please help me out.In specimen question no 2(burung co) used inflation multiplied by years(23.03*1.08/36.60*1.08^2)
Again in Dec 18, question 3(amberle co) used inflation in WC calculation as each year separately without considering years (^)…like 6.48*.106
How do I know when I have to use years as (^) and when I don’t have to.
Thanks a lotI will explain by example:
For revenue and costs, if it is $100 inflating at 5% then next year will be 100 x 1.05 = 105 and the following year will be 100 x 1.05^2 = 110.25.
However, for working capital it is different.
If we need 100 and the is inflation at 5 % then next year we will not need 105 because we already have 100. So we just need to outflow the extra – 5% x 100 = 5.
We now have total WC of 105 and so the following year we just need to outflow an extra 5% x 105 = 5.25.I do explain this in my free lectures for AFM (and the lectures for FM, because this is revision of Paper FM).
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