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Hi,
When looking at the answer for Breckhall NPV question on the Kaplan Study text, I don’t understand why they are increasing their inflation by 1.05 in the 1st year and then year 2 by 1.052. Why are they not increasing each year individually by 1.05? I’m getting different answers from them.
I do not have the Kaplan Kit (only the BPP Kit) and so I do not have this question.
However, it seems that either they have mistyped in their answer or else that you have misread the typing.
If the inflation is 5% per year, then we multiply by 1.05 in the first year, and then multiply by 1.05^2 (i.e. by 1.05 squared) in the second year. Not by 1.052.
It will help you to watch my free Paper FM lectures on investment appraisal with inflation.
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