2013 AM exam - Q6c

Why do we only deduct the amount that was withdrawn (USD 3 mln) from asset portfolio (USD 100 mln), but do not not add the contribution received (USD 2 mln at the start of the second year. I understand that contributions lower our liquidity requirement, but why does it not feed into the foundation’s asset portfolio?

The annual spending requirement is “6% of the market value of its portfolio at the end of the preceding year

When calculating the portfolio’s market value at the end of Year 1, we don’t consider the 2 mn since the question says that Pearce intends to make that contribution on 1 January of each subsequent year , implying that it will start only from Year 2. If we were to calculate the spending requirement for year 3, the USD 2 mn contribution would come into play then.

Thanks a lot!