Sorry to bring this up again, but I reviewed this discussion after some inflation confusion myself. You mention that in the Maclin case, they make no reference to inflation, but they actually do. On the second page of the guideline answer for that problem they say, “Note: No inflation adjustment is required in the return calculation because increases in living expenses will be offset by increases in Christopher’s salary.” Now, they do not mention any inflation in the case, so are we supposed to exclude it if they don’t give us an inflation number? I do not feel comfortable relying on that…
In the 2004 Maclin case: “After-tax salary increases will offset any future increases in living expenses”. - they have a 26000 difference between income and expenses… this difference will increase over time due to inflation as you guys have mentioned. I do not understand why they do not adjust for inflation on this one using the logic of the other cases… Only logic is this test is outdated and they changed it. I am ignoring this case and sticking to the future cases:
2011 is straight forward and they add inflation.
In 2010: In this case, they say, "Her future salary increases are expected to match any increases in living expenses on a pretax basis. They do not adjust for inflation in the return calc. I believe this is because the IRA contribution of 12000 is fixed and will not change with inflation. This doesn’t exactly make sense because the 12,000 difference will increase as a result of inflation. However, they state that this 12000 contribution will be fixed forever… fixed payment = no adjustment for inflation at the end.
2009: Tracy’s “Pension income from both Patricia’s company plan and the government pension plan is fully indexed for inflation”. There is a difference in the pension income and expenses, which will grow over time with inflation. This makes me think add inflation at the end. They also mention maintaining the real purchasing power several times in this case. The return calc includes inflation.
In 2008 part 1: The mortgage payment is fixed at 55k and will not increase with inflation. However, “Their salaries are expected to continue to cover their living expenses to retirement.” There is no difference between their A/T salary and their expenses, so this will not grow and the 55k morgage will not grow. Yet they adjust for inflation in the return calc… They say that they want to maintain the inflation-adjusted value of the portfolio several times in the case. àthis is a 1 period calculation à always adjust for inflation
2008 part 2: This is an IRR calc instead of the 1 year return calc. The mortgage payment is fixed and the a/t salary and expenses are a wash. Payment is fixed. In this case, we do not add inflation because it is an irr calc and the payment is fixed.
1 year calc: Always add inflation
IRR calc: The only time you do not add inflation is when the payment is fixed.
What do ya think?