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Hi,
Would you be able to help please?
I’m having trouble understanding how to calculate the working capital /sales using inflation for NPV/APV..sometimes it is to multiply inflation rate to the power of the year and sometimes it is just to multiply inflation rate alone.
eg Dec 2018 Q3 working capital calculation – multiply inflation rate alone
but Jun 2014 Q2 sales and costs calculation – multiply inflation rate to the power of the yearWhen exactly do I multiply using the power of the year?
Many thanks!
Sales and costs inflate each year at the rate of inflation. So if the sales are $100 at current prices and there is inflation at 5% per year, they will be 100 x 1.05 in 1 year, 100 x 1.05^2 is 2 years, and so on.
The level of working capital also inflate. If we need $100 at time 0 and there is inflation at 5%, then we need a total of 100 x 1.05 = 105 at time 1. However since we already have 100, we just need the extra 5 at time 1 so as to bring it up to 105. Similarly at time 2 we need the total to increase to 105 x 1.05 = 110.25. However again we already have 105 so all that is needed is the extra 5.25 (which is obviously the same as 105 x 5%).
I hope that makes sense 🙂
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