2008 AM Que 1 vs EOC Reading 14 # 13

My understanding is that you could not do a TVM calculation if the two did not offset precisely. Because, your PMT would be different each year and your calculator couldn’t handle that. You would need to use the CF function.

The trick to the 2007 case is that expenses were increasing with inflation each year, but there was NO SALARY. So the “gap” was not increasing at different amounts each year. It was increasing by a constant, steady rate of inflation. And this was accounting for by adding inflation at the end of the return.

i am learning more here than in the curriculum :stuck_out_tongue:

haha yea…i think the 2008 question part 2 is exactly the same as the maclin case

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why they do not adjust for inflation on this one using the logic of the other cases… Only logic is this test is outdated and they changed it.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.

In summary:

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?

I’ll go paragraph by paragraph.

1: This was the whole point i was making earlier. Their note makes no sense. What I think they are doing with the note is simply trying to point out the obvious to us: that the gap between salary and expenses is constant. They want to explain why we are able to use the TVM function (becuase if the “gap” between expenses and salary increases each year, then you can’t use the TVM function). That note makes no reference to the real value of the portfolio.

2: In the Maclin case, there is no inflation. Nothing is mentioned about inflation, real portfolio perservation, etc. That’s why the note in the answer is so odd. In this question we live in a world with no inflation. Just like the 2010 exam.

3: 2011 has inflation added because it is specifically stated that the real value of the portfolio must be maintained.

4: 2010 is a world with no inflation. Stop overthinking. The 2007 case didn’t say a word about taxes, and you didn’t start making up theories for taxes there. If it’s not mentioned, then it’s not to be considered.

5: 2009 has inflation added because it is specifically stated that the real value of the portfolio must be maintained.

6: 2008 Part I has inflation added because it is specifically stated that the real value of the portfolio must be maintained.

7: 2008 Part II has NO inflation added because nothing is stated about the real vlaue of the portfolio being maintained. Look at the new paragraph–nothing. Compare the return objectives of part I and part II. Part I mentions real value of portfolio, part II doesn’t. I think this all makes sense and jives except for their notes at the end of the Maclin case and the 2008 Part II answer. I think it’s just a vague, inconsequential note. That’s all I can say.

It’s also important to note that the Maclin case is all the way back from the 2004 exam–that’s a long time.

Exactly. That is why I am ignoring that one. Thanks! Now we will rock this IPS!!!

Just printed IPS guideline answers(part A only) from 2007 to 2011, one page per year…

yea good idea…tomorrow im planning to do a quick scan for all the recent guideline answers from individual and institutional ips.

i took a nyssa class and the professor strongly recommended not looking past 2009 or 2008.