Return calculation

Patel’s living expenses over the previous 12 months were 400,000. She anticipates these expenses will grow at the expected rate of inflation this year and in each future years. Inflation rate is expected to be 1.25% per year.

Questions asks for required return in coming year.

Why shouldn’t i multiply 400,000 with (1.01252); why only 400,000 (1.0125)?

Because we are finding the rate of retrun for this year only. We are then adding inflation as in the last step.

I am still so confused about this. I thought coming year to mean next year.

So past 12 months, this year and then coming year.

God, i hate these questions.

But thanks for your input!

Expenses in previous year were 400k and they increase with inflation so multiply just once for the coming year. Think of it we are at t = 0 now and 400k was at t-1 and we want to project it to t+1.

Yeah this argues for 2 years inflation impact, not 1 year?

This coming year = pretend today is Dec 31st. You just spent $400k on booze, adderall, ear plugs, exam fees, wifi to torrent your study material, and error-prone CFA mock exams from 3rd-party providers. Youll probably fail, so this coming year all of those costs will be 1.25% more expensive…

She expects her expense will grow at the expected rate of inflation this year. So they will grow by inflation next year, but the expanse given is already after inflation of this previous 12 months. This does not match with the statement that they will grow by inflation

I mean this is really semantics but very unclear, especially for non native speaker

Coming year is the next 12 months and nothing else, plain and simple. That’s how the CFAI interpret it, and that’s how you should be interpreting it as well, rather than trying to argue the logic of it.

coming year = 1 year starting now

next = 1 year starting in 1 year

They give you her expenses for the previous 12 months, so to find expenses for coming year you multiply just once by 1.0125