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While arriving at the Components revenue (post inflation) we do not inflate the revenue in 1st year and do adjust the revenue for inflation subsequently from year 2 to year 4.
However, the doubt is, why do we inflate the revenue of 2nd year by 1.015 and not by 1.015^2?
Please clarify.
The question states the pre-inflation revenues and that they only increase in years 2 to 4. So the revenue in year 1 will not inflate and in year 2 will inflate by year 2’s inflation, and so on.
So as per your reply, Revenue in year 2 should inflate by year 2’s inflation rate i.e 1.015^2, however in the kaplan kit answer they have inflated year 2 revenue by year 1’s inflation (1.015).
Hence the doubt. Please help.
No, that is not what I wrote.
What is in the Kaplan Kit is a reprint of the examiners answer, which is correct.
For component revenue there is no inflation in the first year. The flow at time 2 does inflate but only by the rate of inflation in the second year. The flow at time 3 does inflate but only by the inflation in the second and third years.
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