The typical req.return is (1+spending rate)*(1+mgmt fees)*(1+inflation)-1
but it’s very weird to me that in an exercise where it mentions that the founder will make annual contributions(on 1 Jan from 2nd year) of x million to cover a portion of university’s operating expenses(didn’t see an example in book with CFs with a quick revision).Shouldn’t this be included in the calculation for the particular year it asks?
The solution ignores the CF and uses the typical formula for nominal required return while it includes the CF only in the liquidity requirement.
Yes, this is solution. Do not count contributions (donations) into required return rate than mention under liquidity constraint (for example by comparing 2 Foundations one with and another without donations).
Large Cash Inflow/Outflows are not considered upon return rate. At the other hand, in your example, in given year, founder’s contribution may partially or even in full offset outflow thus cut operating expense of object of financing which is hence primarily a liquidity concern not a return concern.
If youre looking at the question I think you are then reread it. I believe it explicitly says to not offset the return requirement with those contributions. But you may not be, no idea.
Hahahaha I am guessing Bernie Madoff’s scheme was not based on TWRR, I don’t know if it would’ve looked any better using MWRR! I guess this is why GIPS verifiers look for: “Maintenance of books and records supporting the calculation of portfolio and composite returns, including the existence and ownership of client assets.”