NPV BPP EXAM KIT FENHURST COMAPNY (SEP/DEC 16)

This topic has 5 replies, 2 voices, and was last updated 3 months ago by John Moffat.

Viewing 6 posts - 1 through 6 (of 6 total)

Author

Posts
March 28, 2022 at 8:42 am #652090
shaunak22
- Topics: 195
- Replies: 32
n the scenario they have told that the initial selling in YEAR 1 price is expected to be 100 before increasing with the rate of inflation annually

Inflation rate-4% in year 1

DOUBT should we use 100 as the selling price of 100*1.04= 104 as selling price?
March 28, 2022 at 8:48 am #652092
John Moffat
Keymaster
- Topics: 57
- Replies: 49611
The selling price at time 1 is 100, at time 2 is 100 x 1.04, and so on.
March 28, 2022 at 9:22 am #652094
shaunak22
- Topics: 195
- Replies: 32
THE POINT RELEVANT TO CALCULATIG SALES

The initial selling price in Year 1 is expected to be $100 per unit, before increasing with the rate of inflation annually.

The expected annual rate of inflation in the country in which Fernhurst Co is located is 4% in
Year 1 and 5% in Years 2 to 4.

DOUBT – in the solution they have taken 100 per unit in year 1 and then 100*1.05=105 in year 2 (they have completely ignored the inflation figure for year 1 i.e 4%)
March 28, 2022 at 4:54 pm #652143
John Moffat
Keymaster
- Topics: 57
- Replies: 49611
Of course they have.

The question specifically states that the selling price int he first year will be $100. Therefore it is $100 at time 1.

It will inflate in the future years and since the question says that it will inflate at 5% in years 2 to 4 (which you had not written in your previous post), it will be 100 x 1.05 at time 2, and so on.
March 28, 2022 at 9:27 pm #652172
shaunak22
- Topics: 195
- Replies: 32
question specifically states that the selling price in the first year will be $100 thats right but it also say’s that the selling price is 100 before increasing with the rate of inflation annually so doesn’t it means that we have to increase it with the rate of inflation?
March 29, 2022 at 7:41 am #652198
John Moffat
Keymaster
- Topics: 57
- Replies: 49611
It will be $100 in the first year, and will increase with inflation in the following years.

This is very common wording (as it was in Paper FM and my Paper FM lectures on investment appraisal specifically say to watch out for this).
Author

Posts

Viewing 6 posts - 1 through 6 (of 6 total)

You must be logged in to reply to this topic.