Description

Suppose that for an existing business we observe the following levels of sales and macroeconomic information for the previous six years:

Year -6 -5 -4 -3 -2 -1

Sale (millions) $5.30$5.70$5.50$6.30$7.50$8.00

Inflation3.00%2.00%5.00%3.00%4.00%

Change in Real GDP1.00%-2.00%2.00%3.00%1.00%

Use the information in the table to generate sales forecasts for Year 0 by the following approaches.

a. Extrapolation based on nominal percentage growth rates of sales.

b. Extrapolation based on real percentage growth rates in sales. Expected inflation in Year 0 is 2.0 percent.

c. Extrapolation applied to nominal sales, with greater weight on the more recent data.

d. Extrapolation based on the relationship between the real sales growth rate and the annual change in real GDP. The forecast of real GDP growth for year zero is 2.5 percent.