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Hi sir
Bpp solution, part a- When calculating the contribution per room & the fixed cost pa, we are told that the costs are in current prices…so why isn’t the uk inflation rate taken into account in their solution?
Also, should the repairs of 1.2m not be multiplied by (1.025)^5 to factor in inflation, as again, we are given the cost in CURRENT PRICES?
First question:
I don’t know in which book you are looking at the answer, but we do inflate the contribution and fixed costs. In the solution I have (BPP), then the real cash flow from the two is calculated (i.e. ignoring inflation), but then in the next line the net of the contribution and fixed costs is inflated to give the nominal (actual) cash flow.
Second question:
Here you are correct. The BPP answer is wrong because the 1.2M should have been inflated. (The examiners own answer got it correct 🙂 )
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Sir, regarding to your answer above I see the nominal cash flow calculation, though do not understand what rate of inflation was used, as 54.63 / 52 = 1.051, thus rate is 5.1% which is different from any provided in the question. Could you please help on this issue?
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