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In this Question it is said that selling price is expected to be 12.00. It looks like it’s going to be 12.00 in the Year 1. and after that in Year 2 it would be 12.00*1.03 and so on.
The same situation with other prices and costs.My question is: Why do we start calculate inflation starting from Year 1? I mean the price in Year1 is 12*1.03 and so on.
12.00 is not the current price in Year 0. It is expected to be in Year 1.
Did I understood smth wrong?It is because the question says ‘the selling price and all costs are in current price terms’.
If the flows are given in current prices then you automatically inflate for time 1.
(The reason is that it is saying that these would be the amounts this year (when we have not even bought the machine) and therefore the amounts next year would be higher because of the inflation)Have you watched my lecture on this?
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