2008 AM Exam Q1Aii

Both the year 1 salary and the living expense have been inflation-adjusted for 4%, i.e., the inflation is offset. But the mortgage payment of 55,000 is a fixed amount, why the inflation of 4% shall be added to arrive at the “required after-tax NOMINAL return” ? I am confused. Anyone can help ?

this is something that is always done in all IPS required return calcs. this 4% is for the future periods… (to cover inflation into all future periods). This is done everywhere, as far as I have seen.

So, in such a case, inflation shall be added ?

my understanding: you add inflation to protect real value of capital (wealth)