After you go through the calculations of expenses / investment base, you get real return. The question asks for a nominal return. So you are provided with the inflation rate and the tax rate.

[(1 + real return) * (1 + inflation)] / (1 - tax)

[(real return) / ( 1 - tax)] * (1 + inflation)

I think I know it is number 1. Why is it this way and not calculating the before tax return and multiplying by inflation (2)?

I’m not sure that y’all are talking about the same thing.

The question is usually posed this way: you need a 5% return after taxes plus you want 2% to keep up with inflation, and your tax rate is 35%; what gross return do you need?

The answer is . . . it depends. On whether the 2% is taxable or not. And that information will be given to you, explicitly, in the vignette.