Inflation calculation
Hi, everyone. I'd like to ask you a question concerning the calculation of inflation.
Assume I have a company with 3 segments
The segment growth rates in real terms: Segment 1, 2.7% Segment 2, 6.0% Segment 3, 14.5%
If the size of the segments is equal, the company should grow by 2.7% + 6.0% + 14.5% = 23.2% in real terms.
If inflation is 2.5%, I'd calculate nominal growth as 1.232 * 1.025 = 1.2628 -> 26.28% which is the necessary growth rate to offset inflation.
However, if I use another approach and adjust for inflation on a segment level I get a different result.
Segment growth rates in nominal terms: Segment 1, (1+2.7%)(1+2.5%) -1 = 5.267% Segment 2, (1+6.0%)(1+2.5%) -1 = 8.65% Segment 3, (1+14.5%)*(1+2.5%) -1 = 17.362%
Which adds up to 31.279%.
So which is the correct nominal growth rate, 26.28% or 31.279%?
Could anyone of you tell me which approach I should use to account for inflation properly? Thanks a lot.
You have to take the average of the segment growth rates to get the company growth rate.
23.2% / 3 = 7.73%, (1+7.73%)*(1+2.5%) - 1 = 10.43% 31.28% / 3 = 10.43%
Aut et quia quam aperiam. Minima facilis eveniet in. At tenetur expedita iure quae odit. Enim repellendus commodi adipisci aut placeat sunt. Maxime explicabo exercitationem quidem eum soluta. Optio ut architecto numquam dolor itaque qui velit.
Unde consequatur voluptate libero sed tempora. Officiis mollitia molestias laborum quasi pariatur sed rerum. Maiores debitis qui praesentium voluptatibus perspiciatis est.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...