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Hi John.
I was watching the lecture for discounted cash flows (part 1).
Why do we apply the inflation figure to cost of materials but not to revenue (which are told the company raises by 7%, but it is not stated as due to inflation which is 8%)?
Thank you in advance for your kind help.
Just as in real life, different items will inflate at different rates. The question (in the free lecture notes) specifically says at what rates materials, labour and the selling price increase.
Just because the cost of materials is increasing at 8% per year it does not mean that the company will be able. to increase the selling price at 8%. For whatever reason they have decided that the most they can increase the selling price by is 7% (presumably otherwise they would lose sales).
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