Ch.10, Estate Planning, Ex. 4

- This seems like a simple excercise of calculating core capital. The solution is provided with real-risk free rates. However, using nominal rates should yield the same results. In my opinion, there shouldn’t be a nominal inflation growth rate applied to first year spendings (see exhibit 2 for reference). Then, the discounted value in the first year should be 1000,000 / (1.05) = 952,380 instead of the given 980,360 and the capitalized core capital over three years totals 2.802 million vs. the given 2.882 million.

Even if I apply an inflation growth rate starting with the first year, results will differ from the values in the curriculum book.