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Dear John,
Sales revenue for year 3 is ‘132,500x100x1.052×1.2×1.3’.
It is clear for that 1.2 and 1.3 are increased in sales volume by 20% and 30% in years 2 and 3 respectively. What I do not understand why 1.052? Selling price for year 1 is 100, for year 2 to be increased by 1.05, then for year 3 to be increased by 1.04. So 1.092 to be used rather 1.052. Where am I wrong?
Thank youTwo things.
Firstly, the BPP answer is mistyped. Although they have typed 1.052 and 1.053, it should read as 1.05^2 and 1.05^3 (and they have done the actual calculation correctly).
Secondly, although the inflation in year 1 is 4%, the selling price is written in the question to be $100 in year 1. So it only inflates in year 2 onwards and the inflation in year 2 onwards is 5% (the 4% is therefore not relevant).
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