# 2010 AM and CFAI EOC pretax confusion

Question 1 in the 2010 AM calculates the return as follows: FV = 2 mio (pretax) PV = -225,000 N= 25 PMT = -12,000 I/Y = 7.05% pretax Q- as per their calculations, 12K contribution to the account can come from the pretax salary then why show it as a payment in the calculation above? Also, why cant we do this question like CFAI EOC Q 13, where the following is the calculation of pretax return: FV = 2 mio (pretax or post not mentioned) PV = -1,235,000 N = 18 PMT = -26,000 (post tax shortage of income to meet expense) I/Y - 4% (approx… post tax) Therefore pre tax = 4%/(1-t) = 4%/(0.6) = 7% (approx) please help clarify

ill look at this tomorrow morning if no one else has, but have a free bump to the top in case someone else is up for this right now. there should be an answer out there

thanks Skip

correction - read payment as positive 26 K in the above mentioned question

I understand your points. A. I believe CFI’s solution is wrong because the 12K investment in TDA can be paid from the salary of 140K. B. Even 12K is accounted for as cash outflow, it shall be grosses up as 7.05%/(1-0.25) =9.4% because 200K required at t=25 shall be after-tax amount. I always got calculated results which were different from CFAI’s solutions, either in EOC or in old exam questions. Sometimes, I really doublt if their solutions are correct and I am very very much confused. Unfortunately, IPS accounts for a big % in AM exam. I almost totally lost my confidence on this portion of CFAI’s curriculum/EOC Q/Old exam solutions. There are no clear rules at all. My suggestion to you is to send an e-mail inquiry to CFAI and request them to clarify. But I am afraid they will not admit their errors at all as I was told by some candidates who took the exams in the past.

alta168 Wrote: ------------------------------------------------------- > I understand your points. > > A. I believe CFI’s solution is wrong because the > 12K investment in TDA can be paid from the salary > of 140K. > B. Even 12K is accounted for as cash outflow, it > shall be grosses up as 7.05%/(1-0.25) =9.4% > because 200K required at t=25 shall be after-tax > amount. > > I always got calculated results which were > different from CFAI’s solutions, either in EOC or > in old exam questions. Sometimes, I really doublt > if their solutions are correct and I am very very > much confused. Unfortunately, IPS accounts for a > big % in AM exam. I almost totally lost my > confidence on this portion of CFAI’s > curriculum/EOC Q/Old exam solutions. There are no > clear rules at all. > > My suggestion to you is to send an e-mail inquiry > to CFAI and request them to clarify. But I am > afraid they will not admit their errors at all as > I was told by some candidates who took the exams > in the past. If you want to argue with CFAI, have fun studying for the 2012 exam. Learn their process, love it and live it. If they had one error then fine, but if you’re getting all of them wrong then I’m sure its you and not them.

i can only imagine the varying answers they get for the IPS questions.

> If you want to argue with CFAI, have fun studying > for the 2012 exam. Learn their process, love it > and live it. If they had one error then fine, but > if you’re getting all of them wrong then I’m sure > its you and not them. Agreed 100%.

alta168 Wrote: ------------------------------------------------------- > I understand your points. > > A. I believe CFI’s solution is wrong because the > 12K investment in TDA can be paid from the salary > of 140K. > B. Even 12K is accounted for as cash outflow, it > shall be grosses up as 7.05%/(1-0.25) =9.4% > because 200K required at t=25 shall be after-tax > amount. > > I always got calculated results which were > different from CFAI’s solutions, either in EOC or > in old exam questions. Sometimes, I really doublt > if their solutions are correct and I am very very > much confused. Unfortunately, IPS accounts for a > big % in AM exam. I almost totally lost my > confidence on this portion of CFAI’s > curriculum/EOC Q/Old exam solutions. There are no > clear rules at all. > > My suggestion to you is to send an e-mail inquiry > to CFAI and request them to clarify. But I am > afraid they will not admit their errors at all as > I was told by some candidates who took the exams > in the past. _______________________________________________________________ The questions a window to the morning exam. The answer given by CFA is right, do you think they will publish the wrong answer after 9 months of the exam. The different treatment is due to TDA unlike other prior questions on Individual investors.

amg and alta168, The 12K is coming from the pretax salary. Lima needs to grow her portfolio to 2 million in order to buy the annuity product. With 225,000 initial value, 12000 contribution per year will not grow it into the 2 million. The extra amount required to grow it into 2 million is the 7.05% required return from the portfolio. This is the reason why 12000 has been taken as minus 12000 in the PMT field because it is a contribution into the account not a cash flow out of the account. Q13 from the reading is very different. Over there the Maclins need 26000 (because they earn 80000, tasex are 32000 but their expenses are 74000) which implies that this cash flow should come out of the account. PMT field will be plus 26000. All of the above calculations are based on a PV with a negative sign and a FV with a positive sign. For what its worth, here’s my opinion: CFAI’s calculations are usually theoretically accurate. For exam purposes that’s what we need to do. Good Luck.

If you have: a cash inflow - same sign as PV a cash outflow - opposite sign as PV

How are they getting a PV of 225,000? It says that the current value of the TDA is \$250,000. Is this an error or do you have to discount the TDA back?

thepinkman Wrote: ------------------------------------------------------- > How are they getting a PV of 225,000? It says > that the current value of the TDA is \$250,000. Is > this an error or do you have to discount the TDA > back? read the para just before the question, it states the value as \$225k