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Reading 12 - CFAI EOC - Question 17

I am trying to understand the calculations involved in the PV calcs for Capital needs.  In the question it gives us family living expenses and states that it will decline by 30,000 per year.  However, in the answer this detail in not included in teh PV or mentioned in any way.   Am i supposed to somehow assume that it is already included in Olivia’s and the children’s living expenses?  If anyone could explain the logic here it would be greatly appreciated.

These questions are included on the webpage as a supplement since they weren’t included in the books themselves.

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The logic must be that the “Cash Needs” in Exhibit 1 are used to close out the “Family” expenses.  But, then why would they put a bullet point about Family expenses declining by 30,000 per year if Adrian dies?  This seems to imply that we should factor a PV of the declining expense as separate from the Cash Needs…..   This question seems to me to be very misleading and a potential trap.  

Can anyone please brief up on this? I am stuck on the exact same thing. 

The 30k decline is reflected in the reduction on expenses from the mom and the kids. Its already done for you in the very next sentence.

Bringing this back from the dead. We used real discount rate to compute for the PVs? 

It was a long shot, glad i made it.

bump. why did we remove the growth factor in the discount rate? i assume the growth factor is the inflation.

It was a long shot, glad i made it.

Epsilon wrote:

Bringing this back from the dead. We used real discount rate to compute for the PVs? 

Yes. Numerator is real so even denominator needs to be real.

Epsilon wrote:

bump. why did we remove the growth factor in the discount rate? i assume the growth factor is the inflation.

What do you mean ? 

saurabh03121992 wrote:

Epsilon wrote:

Bringing this back from the dead. We used real discount rate to compute for the PVs? 

Yes. Numerator is real so even denominator needs to be real.

How’d we know that the income and expenses figure were in real terms? Like where in the case it says numbers were in real terms.

One week to go and this still confuses me. Please help

It was a long shot, glad i made it.

Epsilon wrote:

saurabh03121992 wrote:

Epsilon wrote:

Bringing this back from the dead. We used real discount rate to compute for the PVs? 

Yes. Numerator is real so even denominator needs to be real.

How’d we know that the income and expenses figure were in real terms? Like where in the case it says numbers were in real terms.

One week to go and this still confuses me. Please help

The living expenses increase by the rate of inflation every period.