June 2011 – How do you calculate Inflated Variable Cost?

Please can someone tell me how on a calculator to work out the Variable cost for year 2

Variable Cost before Inflation = 2.80
Variable Cost Inflation is 2.5%

Yr1 = 2.884 – This is ok, I know how to calculate

Variable Cost before Inflation = 3
Yr2 = 3.183 ??

And how do you know if you need to use this method instead of just adding 3% so yr 2 would be 3.09

Thanks a mill