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I have always faced this problem, whether to Inflate the values from year 1 or from year 2. For e.g. in the pilot paper for P4, Q1. The examiner has inflated the exchange rate starting from year 1, but he has inflated the Variance cost of 1350 and the Ho supplied Component of 7$ starting from year 2. But, i have seen in many other questions in study texts, these costs getting inflated from year 1 ( i.e. treat the values given in the question as year 0 values ). Can you please help me to understand how to decide, should we inflate from year 1 or from year 2?
It is really a question of the exact wording in the question.
If you are ever told that the flows given are at current prices, then you automatically inflate in year 1.
On the other hand, quite often you are told that the flows in the first year are expected to be XX. In this case, they are the actual flows at time 1, and it is only later years that get inflated.
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