# calculate the required before-tax return

Asset Base = 5 million Annual after tax spending =150,000 future inflation = 3.5% Donation in one year = 750,000 Risk free rate - 4% Income tax - 25% Now calculate required before tax return and show your calculations.

5,000K - 750K/1.04 = 5,000K - 721.15K = 4,278.85K [(1+ 150K/4,278.85K) x (1+ 0.035) - 1]/(1-0.25) = 9.5%

right AMC but I am wondering why don’t we take 150/.75 = 200K (before tax annual spending expenses) and do the calculation instead of finding the value first and converting it before taxes?

AMC Wrote: ------------------------------------------------------- > Please refer to : > > http://www.analystforum.com/phorums/read.php?13,11 > 27642,1127681#msg-1127681 AMC, I totally agree with you to gross up for before-tax return lastly. However, would you please look at the CFAI 2009 Morning Exam Q1 Part A answer? I really got confused by CFAI answer. Why they gross up to before-tax first and then add the inflation? Is it because the individual’s pension is adjusted to inflation? Thanks in advance.

Indeed, I am now confused again. Originally, I was doing in the same way as CFAI’s 2009 Morning Exam Q1 Part A answer (I did not look at CFAI’s 2009 Morning Exam Q1 Part A answer at that time). But after my discussion with some guys, I accepted their idea which shall be more reasonable. Now I don’t know which way I shall follow on the exam. Let’s check CFAI’s text and come back later.