Reading 10, #12. There was a thread discussing liquidity but I have different questions on the return requirement:
Looking over old exams (CFAI and Schweser) it seems that if you have net expenditures that occur in the “near future” they’re considered current and are subtracted from the initial asset base. But that’s not done in #12, in terms of the -45k. Any further clarity as to which expenses you must adjust the initial asset base for vs those that you don’t?
Again I’m not clear on on expense timing. To me, it seems that the -45k is “current year” (ie this year), given that “our annual after-tax living costs are expected to be $150,000 for THIS YEAR” and year 1 expenses should be the inflation-adjusted -49.5k. But the CFAI answer treats that as year 2. I could swear that I’ve seen old tests that treat it differently. Any thoughts here?
The return I would estimate is (150,000*1.03 - 65,000 - 40,000) / (1,200,000 - 200,000 - 45,000) * 1.03 -1 = 8.3%
Gah I hate IPS.