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Hello sir,
I have a small issue… in both the above mentioned questions inflation is treated differently
In chumura co inflation is incorporated from year 1 ..however in tramount co. Question inflation of variable costs is taken from year 2. There is no inflation in year one and original costs are taken.
Which way should i follow? Or are both approaches correct?It depends on the wording of the question.
In Chmura you are told that the flows are at current prices, and therefore the time 1 flows need inflating.
In Tramont, the question says that the variable costs apply to the first year of operation and therefore they apply to the first year and it is only in later years that they will apply.
If you are still unsure then look back at the Paper FM lectures on Investment Appraisal with Inflation, because the need to check the wording of the question carefully when there is inflation is explained in detail.
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