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Que 13 of BPP KIT
the initial selling price in year 1 is expected to be 100 per unit before increasing with inflation rate annualy …inflation rate for year 1 is 4%…
So now at year 1 will the price be 100 or 100×1.04??
Our teacher always advised us that inflation starts from year 1 even in FM paper calculations i always started to do s.p×inflation rate- for year 1
S.p×inflation rate^2-for year 2
S.p×inflation rate^3-for year 3I am afraid that your teacher advised you wrongly.
If the flow is quoted at current prices then the flow at time 1 will indeed be inflated.
However this question (and it is very common in the exam) specifically says that the selling price is 100 in the first year. Therefore the time 1 flow is 100 and it only inflates in the following years.I suggest that you watch my free Paper FM lectures on investment appraisal with inflation, because it was the same in Paper FM (was Paper F9).
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