I refer to Exhibit 4 on page 166, I see that inflation has been accounted for ( eg. trust payments for Hilda Inger) . But why is inflation of 3% added in Exhibit 5 ? Is it not double counted ? Thanks so much !
It appears the only the trust payment to Hilda is double counted for inflation. The rest of the asset base does not include any inflation requirement upfront to account for maintaining real purchasing power. Therefore you need to adjust your return requirements to maintain your real return by inflation. I intrepret the CFAI example in this way: Inflation is an arbitraty number that they choose as 3%. They double counted the inflation on the trust payments but overall the concept remains the same - when determining return requirements, include inflation induced returns as well.
Hmm… subjective stuff scares me… anyway there is time so will see. Thank you !