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Here all elements ie selling price,var costs,fixed costs etc have the same level of inflation so cant we use the nominal rate for all of them without doing any inflating to all of the elements?
I don’t know which question you mean – there was no question called BRT in the June 2011 exam. (The only investment appraisal question says to ignore inflation!).
In general, if all flows have the same level of inflation then you can use the real rate (not the nominal rate – you use the nominal (actual) rate on the nominal (actual) cash flows; or you can use the real rate on the current price flows ignoring inflation). I cannot actually remember a real exam question with inflation where all of the flows had the same rate of inflation.
However, one problem is that the real rate is unlikely to come to an exact percentage and so you would really need to calculate the discount factors yourself rather than be able to use the discount tables.
Sir it was the june 2011 qs on npv.all figures have been inflated and then the nominal rate has been applied in the bpp kit
Sorry – I have found it (I don’t know where I was looking before 🙂 )
Anyway, the question specifically asks you to take a nominal terms approach. This means to calculate the nominal (actual) cash flows and discount at the nominal (actual) cost of capital.
If they had not said this, then you could certainly have taken the current price cash flows (ignoring inflation) and discounted at the real cost of capital which would be 1.12/1.03 – 1 = 0.0874 or 8.74%
However it would then have meant you would have to calculate the discount factors yourself because the tables don’t have factors for 8.74%.
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Hi,
Can you please tell me how get the inflated variable cost for 2nd year using sales volume
Sales volume
Year 1- <1m
2 – b/w 1 & 1.9
Current variable cost 2.80 & 3 respectively
Inflation 3%
First year- 2.80*3%*1+2.80= 2.884
Second year – 3*3%*2+3= 3.18Answer given is 3.183
Thank you in advance for your help
In the first year there is 1 years inflation and so it is 2.80 x (1.03) = 2.884
In the second year there are 2 years inflation and so it is 3.00 x (1.03) x (1.03) = 3.1827 (the examiner has rounded it to 3 decimal places)
Sir,
hw wil we know that we ve to double the
inflation rate.it say average is that the reason? .Thanks in advance.It’s not simply a question of doubling it. The inflation rate is per year, so if the flow is in two years time then there will be two years inflation. If the flow is in three years time then there will be three years inflation, and so on.
You really should watch the free lecture on this!
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