- This topic has 1 reply, 2 voices, and was last updated 7 years ago by
.
- Posts
Sir,
I have few queries on example 1 of chapter 16 in OT notes.
Firstly, the question mentions material and labour at current prices as 8 p.u and 7 p.u and says it inflates at 8% pa and 5% pa respectively. In the solution these expenses at year 1 is taken at one year inflated figures (eg. material at 108%) which assumes that materials is purchased at the end of the year 1. I am not sure I about this but I feel the inflation should start to take effect from year 2 onwards as the production sold in year 1 would have been produced during year 0. Please clarify.
Secondly, at the end of the solution there is some other calculation with different values discounted at 5% instead of 10% and arrives at the same NPV as the original answer. Please explain what this calculation is illustrating.
Regards,
AkashIn DCF, to simplify calculations, revenue and expenses are usually assumed to occur at the end of each year. So, the first revenue will occur at Time 1, 12 months from now. By then, prices will have inflated by 1 year. Essentially, a price at say 31.12.2017 will be the same at 1.1.2018. Similarly with costs.
I think the second set of calculations should not be there now. Sorry for the confusion caused.
- You must be logged in to reply to this topic.