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I can not understand how the inflation rate was used for yr 2 to 4 on selling price and variable cost and also Tax allowable depreciation for year 4. Please help explain!
Dear Ajoke,
Suppose selling price is $ 10 and variable cost is $ 5 and the inflation rate is 5%
Sales at Y1 $ 10 x 1.1^1 = $ 11
Sales at Y2 $ 10 x 1.1^2 = $ 12.1
Sales at Y3 $ 10 x 1.1^3 = $ 13.31
Sales at Y4 $ 10 x 1.1^4 = $ 14.64the symbol (^) is the power sign on the calculator, all inflation are carried in the same way
Initial Investment 1,800,000
Dep @ Y1 (450,000) 99,000 Tax Saving @ 22%
Balance 1,350,000
Dep @ Y2 (337,500) 74,250 Tax Saving @ 22%
Balance 1,012,500
Dep @ Y3 (253,125) 55,688 Tax Saving @ 22%
Balance 759,375
Scrap Value –
Balance Allowance 759,375 167,063 Tax Saving @ 22%
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