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Hi Sir
In this question, there is stated how much the inflation for the country and it not stated that the figure already adjusted to inflation, however in the assumption it says “specific inflation rates have been incorporated into the appraisal”. How do we know this? or and assumption is enough to not make a tedious calculation?
Thanks
Sorry, but this question is not in the current edition of the BPP Revision Kit and nor is it a past exam question. So I do not have it and therefore I cannot really explain.
However, it would seem that it gives the general rate of inflation for the country. This rate is not going to apply to all the specific flows – that would be extraordinary. In real life, it is certainly not the case that all revenues and all expenses inflate at the same general rate.
If not given specific rates for each flow, then there is no choice but to assume that they have already been incorporated into the cash flow estimates.The question is taken from the technical article actually. Sorry, forgot to mention it.
The flows have been inflated by the specific inflation rates given in the question (see the workings for revenue and for material, for example)!
So the fact that the specific inflation rates have been incorporated is not an assumption, it is a fact! The assumption really is that the specific rates stay constant (which is obviously unlikely in real life).
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