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Dear sir
I know i asked you before on my confusion with the first year and current but there is one unanswered area.
The inflation rates are given as 4% first year and 5% year 2 to 4I thought that meant end of year 1 seeing that the inflation occurred during that year that for y2 prices y1 would apply, but i see the answer applies Year 2 for 5% to the year after the first year. Can you say what the clues are in choosing the right timing?
The question specifically says in the section under “investment in the Milland” that the selling price and the costs are those that will occur in year 1.
Year 1 flows are always assumed (unless told otherwise) to occur at the end of the year, which is time 1. Therefore no inflation applies for time 1 0 only from time 2 onwards.
This is really revision of Paper FM (old Paper F9), and if you watch my free lectures on investment appraisal with inflation in the FM lectures, then you will see that I make a big point of the importance of watching out for this.
Dear Sir
I really understand that.
What I do not understand is that they say the inflation rate for y1 is 4% and 5% 2 onwards.
i would have thought inflation rates would drag behind one year so 4% would apply to year 2 costs
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