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” The expected rate of inflation in the country Fernhurst is located is 4% in year 1 and 5% in years 2 to 4 “.
Can you explain me the inflation calculation in this question please ?
I am sorry but I don’t understand what you are asking – the question tells you the rates of inflation.
I mean, when calculating selling price for year 2, why do we inflate $100 by 5% and not by 4% ?
Whereas when calculating working capital investment for year 1, we inflate $1025 000 by 4%…
Thank you for your prompt response!
The question says that inflation in the first year is 4% and is 5% from then on.
As far as the sales are concerned, the question says that the selling price in the first year is $100 and so it does not need inflating for the first year. For the second and later years we will inflate, but the rate for future years is 5%.
As far as the working capital is concerned, the investment is made immediately – time 0 (i.e. start of the first year). Therefore the amount needed will inflate at 4% for the first year, and then at 5% for the later years.
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