Urgent Help – NPV Question from March/June17 Sample – ACCA Website

@malavika146 said:
Hello,

I would appreciate if any of you could please clarify the calculation of the Selling Price from Year 2 onwards in the question below which I am practising from the ACCA website from March/ June17 Sample Questions. The solution in the Answers is as follows:

Year 1 2 3 4
Selling Price 26.5 28.5 30.0 26.0
Inflated at 3.5% per year 27.43 30.53 33.26 29.84

As per my understanding the selling price for Year2 should be 28.5*1.035 = 29.49 but in the solution it is given as 30.53.
Request anyone to kindly clarify how the selling price for Year 2, 3 and 4 has been calculated. I am panicking since the exam is day after tomorrow.

Thanks for your help.

Regards,

Hi Malavika,

I have had a quick look at the question and the ACCA solution are correct. I will explain below why:

If you are saying that the price in Year 2 now is 28.5 and is not inflated then this is the same as saying that today the selling price is 28.5. Two years later, it will be 28.5 x 1.035 x 1.035 = 30.53 as it needs to be inflated for next year(year 1) and again for the year after (year 2). So in two years time the selling price will have been inflated twice from today to 30.53

In year 3, i.e 3 Years from today it would need to be inflated three times from today value of 30.0
so that is 30.0 x 1.035 x 1.035 x 1.035 or 30.0 x 1.035^3(to the power 3) = 33.26

I hope that clarifies the situation and helps.

Many regards,
Samir

@malavika146 said:
Hi Samir,

Thanks a lot for your reply. Yes its indeed very helpful. Incidentally I also just figured out the calculation but thanks a lot for your explanation.

Regards,

Malavika

No worries, glad I could help and good luck on Friday for your F9 exam.