 # 2007 exam - Ques 1

I am looking at the solution given by CFAI and wondering why the rate was not calculated in the following way: 1. Compute the FV of weath to be transferred = 3000000 * ( 1.025 ) ^ 35 2. Compute the FV of yearly expenses Pmt = 200000, n = 35 i = 2.5 ( inflation) Total FV required = #1 + #2 ( from above ) So to calculate return, we use the following PV = 4000000. FV = Total FV required from above. Pmt = 0 n = 35 years. Using the above my answer comes out to be 4.4 % What am I missing?

1. Compute the FV of weath to be transferred = 3000000 * ( 1.025 ) ^ 35 you dont have to do it. as you will adjust for inflation later on. 2. you didnt adjust income for inflation. Adjusted is 205,000 3. you dont need to specify 2.5, it is just wrong

why though are they only adjusting the first year for inflation for the payment. Shouldnt it be growing at 2.5% a year. This is what I did not understand from their calculation.

wjj83 Wrote: ------------------------------------------------------- > why though are they only adjusting the first year > for inflation for the payment. Shouldnt it be > growing at 2.5% a year. This is what I did not > understand from their calculation. read very careful. they said they need 200k IMMIDEATLY. That means return for portfolio for NEXT YEAR should be 200k * (1+inf)

yeah but what about year two three etc

wjj83 Wrote: ------------------------------------------------------- > yeah but what about year two three etc this is where after you get the answer you + the 2.5% inflation rate

ok got ya Thanks