In the question it is mentioned that ," Carvalhos have BRL 500,000 in Investable assets currently all in short term bank deposits. It is their intention to maintain at least this amount in investable assets on an inflation adjusted basis in the future.
As per the guideline answer the return has been computed by taking outflows and dividing them by investable asset base of 995,000.
My confusion is that why did they not do anything with the minimum required investable asset base information mentioned above?
In 2007 paper , the investors wanted to have atleast 3 million at the end of their planning horizon and their current asset base is 4 million and outflows are 205000. Answer was PV = 4 mil , PMT = -205,000 PV= - 3mil and N =35 years.
Are we not supposed to answer the question in the same way for 2008 as well?
If you can present more details regarding the question this would clarify your inquiry more. However, based on what I have understand, you have to distinguish between the investable asset base and the required asset base that the investor is seeking. In the 2007 paper, the 4 million represents the current asset base that the investor has right now. The 3 million is the needed cash the investor want at the end of the planning horizon after paying all the needed spending expenses.
Hi, thanks for a prompt reply. I am writing down some key points from the question :
Roberto and Mariana Carvalho live in a large city in Brazil with their two children, ages four and two. Roberto is 30 years old and Mariana will be 30 years old later this month. Their annual salaries total 120,000 Brazilian reais (BRL) after tax. Their salaries just cover their living expenses. The average annual inflation rate is four percent and their salaries and expenses are expected to increase at this rate.
Mariana’s parents have significant wealth and funded an irrevocable personal trust for her. Brazil has a wealth transfer tax that applies to transfers into trusts and to inheritances. The current value of the trust is BRL 1,500,000. The terms of the trust state that when Mariana reaches the age of 30, she will receive a tax-free distribution of half the value of the trust. The balance of the trust will remain invested and will distribute in total to her when she reaches age 40. Since she does not have access to the remaining balance for ten years, this balance is not considered a part of the Carvalhos’ investable assets, but is part of their total net worth. In addition, Mariana expects to inherit a substantial sum of money upon the death of both parents.
The Carvalhos have BRL 500,000 in investable assets, currently all in short-term bank deposits. It is their intention to maintain at least this amount in investable assets, on an inflation-adjusted basis, in the future.
The asset base after the required calculations was 995,000 . And they plan to retire in 30 years. They have a mortgage payment of 55000 in the coming year which will run for 30 years . So the only expense is 55000.
I treated this question as 'not invading the corpus" type of question and attempted it
PV= -995000 PMT= -55000 N=30 FV=500,000 . And the answer was actually 55000/995000 =5.53% plus expected inflation of 4% = 9.53% .
I am missing something conceptually and its bugging me from past 2 hours.