Was reading page 114-115 of the Reading 14 on IPS. According to Exhibit 4 & 5, the required rate of return is 4.17% derived by 3% (inflation) + 1.17% (real). Where 1.17% was calculated by 493949/42340437. However, according to Exhibit 4, EUR 493949 is calculated by Cash Inflow (in nominal terms) - Cash Outflows (in nominal terms). If EUR 493949 is in nominal term, why is it that it can become real return when it is divided by the investable assets?
EUR493,949 is the projected cash needed in Year 2. After dividing it by current investable assets, you get 1.17%. However the Year 2 projected cash was estimated using current purchasing power and since that amount of money in a year’s time may not be able to purchase the same amount of goods and services as it would purchase today, it needs to be adjusted for the inflation rate of 3%. In the absence of inflation the projected cash will be all that is needed, with no extra on top.
me.tega Wrote: ------------------------------------------------------- > EUR493,949 is the projected cash needed in Year 2. > After dividing it by current investable assets, > you get 1.17%. However the Year 2 projected cash > was estimated using current purchasing power and > since that amount of money in a year’s time may > not be able to purchase the same amount of goods > and services as it would purchase today, it needs > to be adjusted for the inflation rate of 3%. > > In the absence of inflation the projected cash > will be all that is needed, with no extra on top. I think your explanation not quite right because if it is using current purchasing power for both cash inflow and cash outflow, it means the projected year 2 cash shown in Exhibit 4 is in real terms. But it can be seen that it is in nominal terms. The evidence that it is in nominal terms can be seen by the adjustment for inflation for “Support for Jurgen”, “Living and misc expenses” and “Trust payment: Hilda” under Exhibit 4. I figured out the reason why there is a 1.17+3% despite 1.17% is in nominal term. The additional 3% to the return is because the existing assets’ purchasing power deceases due to inflation. To ensure the existing assets does not erode in value due to inflation, the ROI must surpass the inflation. The 1.17% is to meet the distribution need of the Peter an Hilda. The additional 3% is to protect their assets from eroding due to inflation.
bell99 Wrote: ------------------------------------------------------- > me.tega Wrote: > -------------------------------------------------- > ----- > > EUR493,949 is the projected cash needed in Year > 2. > > After dividing it by current investable assets, > > you get 1.17%. However the Year 2 projected > cash > > was estimated using current purchasing power > and > > since that amount of money in a year’s time may > > not be able to purchase the same amount of > goods > > and services as it would purchase today, it > needs > > to be adjusted for the inflation rate of 3%. > > > > In the absence of inflation the projected cash > > will be all that is needed, with no extra on > top. > > I think your explanation not quite right because > if it is using current purchasing power for both > cash inflow and cash outflow, it means the > projected year 2 cash shown in Exhibit 4 is in > real terms. But it can be seen that it is in > nominal terms. The evidence that it is in nominal > terms can be seen by the adjustment for inflation > for “Support for Jurgen”, “Living and misc > expenses” and “Trust payment: Hilda” under Exhibit > 4. > > I figured out the reason why there is a 1.17+3% > despite 1.17% is in nominal term. The additional > 3% to the return is because the existing assets’ > purchasing power deceases due to inflation. To > ensure the existing assets does not erode in value > due to inflation, the ROI must surpass the > inflation. The 1.17% is to meet the distribution > need of the Peter an Hilda. The additional 3% is > to protect their assets from eroding due to > inflation. I agree with you. This is one of the Ah-hah moments… thanks.