leadcfa

send an email to info@cfainstitute.org
They immediately give you a response saying 1-2 business days. And they are usually good about curriculum book related errata / doubts.
I am however not sure if they will provide you with an answer there.
If you had the question in mind - post it here … so we can all try to arrive at a resolution together / with the help of other outside resources. I know a lot of folks are doing classes and could ask the Professor (either live or during chat sessions) and so on.

Bluetick1010

janakisri wrote:
I think the key here is that 2008 q says salary and expense rise at the rate of inflation .
But EOC #13 says salary growth offsets living expense growth .
offset is a bigger deal while growing linearly may not offset . For example if living expense is 100k and salary is 80k then gap is 20k in the beginning. If both go up by 5% ( i.e. no offset ) then the gap between living and salary will go up by 5% , so that the portfolio will begin to erode. So we must calculate a nominal rate of return as the current rate + 5% ( being inflation ) . The portfolio has to be the offset .
sorry to bring this back from the dead when we all thought it was resolved, but i just did the 2008 question today.  
in 2008, the expenses = salary.  it says “salaries just cover their living expenses”.  so there is no gap.  if expenses were 120K and salary was 119K, then fine, the gap increases each year.  but theyre the same.  so even in 300 years, they’ll both be equal if both grown at the same inflation rate.
i think the real key is that the maclin case does not desire to grow the portfolio at the inflation rate (no mention of preservation made, no inflation rate given). DO NOT ADD INFLATION.
the 2008 case part I explicitly says they want to maintain the portfolio value in real terms, and it is even listed in the formulation of the objective.  ADD INFLATION.
in the 2008 case, in the second part, you dont add inflation.  they have no real wealth preservation objectives.  in that new paragraph, no mention is made of wealth preservation, and it is not included in the new formulation of the return objective.  to me, this meant that real value does not need to be preserved.  just get to a desired terminal value, like the maclin case.  DO NOT ADD INFLATION.
in the 2007 case, they explicitly say they want to increase the portfolio with inflation.  so you need one portion of your return to cover expenses and one portion to cover real welth preservation of the asset base.  ADD INFLATION.
if this is correct (please correct me if u disagree), then i think there is something off with the way CFAI explains this in the answer key.  in the maclin case and in 2008 part 2, they say that salary and expenses just offset. im not sure i understand this explanation.  both salary and expenses offset in the 2008 question part 1, yet we still added inflation there.  so to me, the key is wealth preservation vs. reaching a terminal value, not salary and expenses offsetting.

Gypsy

TheShow…. totally agree with your assessment, and if it’s wrong I don’t know how to correct it anyhow.  I also agree the CFAI answers are too surface level and inconsistent.  I emailed them with multiple detailed questions over a month ago and never got a reply.  I have had run-ins with them in the past and once you back them into a corner they just choose to not answer. How very “ethical” of them.

RobertA

yea i mean i agree with all of the math and answers so i wouldnt say its wrong.  they probably are just being very unclear/vague with the notes they have in both maclin and 2008 cases.  ”salary/expense is a wash”–are you kidding me?

Analyze_This

TheShow, theoretically for the maclin case, what has to happen for inflation adjustments to be made?
[1]Suppose expense/income do not offset and that expenses increase at inflation while income does not…would we multiply the expenses by (1+infl) in the CF section AND NOT add inflation in return requirement ?
[2]Suppose expenses/income do not offset and that expenses increase at inflation while income does not AND we want to preserve purchasing power…would we multiply the expenses by (1+infl) AND add inflation in return requirement?

smartpants

Now that I think about it, the notes they put for the Maclin case and the 2008 case don’t address inflation of the portfolio whatsoever.  The notes are not wrong–they just simply refer to the expenses/income rather than the tacking on of the inflation.
In the Maclin case, the note is just referring to why the annual salary and living expenses are not higher numbers.
In the 2008 case, the note is just referring to why the PMT function does not need any adjustment for living expenses–it’s because the salary covers it.
That’s all they are saying.  In other words, they are stating the obvious to us (that salary = expenses and the return objective does not need to be increased to account for living expenses).  And they are NOT making any reference whatsoever to the inflation rate that is to account for real portfolio growth, but that’s because it is unnecessary to add them in both places.
I think this is the answer to this problem and makes the 2007, two 2008, and Maclin returrn objectives agree.  Not bad for three hours of brain torture.

maratikus

Alladin wrote:
TheShow, theoretically for the maclin case, what has to happen for inflation adjustments to be made?
[1]Suppose expense/income do not offset and that expenses increase at inflation while income does not…would we multiply the expenses by (1+infl) in the CF section AND NOT add inflation in return requirement ?
[2]Suppose expenses/income do not offset and that expenses increase at inflation while income does not AND we want to preserve purchasing power…would we multiply the expenses by (1+infl) AND add inflation in return requirement?
My understanding is that you could not do a TVM calculation if the two did not offset precisely.  Because, your PMT would be different each year and your calculator couldn’t handle that.  You would need to use the CF function.
The trick to the 2007 case is that expenses were increasing with inflation each year, but there was NO SALARY.  So the “gap” was not increasing at different amounts each year.  It was increasing by a constant, steady rate of inflation.  And this was accounting for by adding inflation at the end of the return.

dcfox83

i am learning more here than in the curriculum

atate2007

haha yea….i think the 2008 question part 2 is exactly the same as the maclin case

wake2000

Sorry to bring this up again, but I reviewed this discussion after some inflation confusion myself. You mention that in the Maclin case, they make no reference to inflation, but they actually do. On the second page of the guideline answer for that problem they say, “Note: No inflation adjustment is required in the return calculation because increases in living expenses will be offset by increases in Christopher’s salary.” Now, they do not mention any inflation in the case, so are we supposed to exclude it if they don’t give us an inflation number? I do not feel comfortable relying on that…
In the 2004 Maclin case: “After-tax salary increases will offset any future increases in living expenses”. - they have a 26000 difference between income and expenses… this difference will increase over time due to inflation as you guys have mentioned. I do not understand why they do not adjust for inflation on this one using the logic of the other cases… Only logic is this test is outdated and they changed it. I am ignoring this case and sticking to the future cases:
2011 is straight forward and they add inflation.
In 2010: In this case, they say, “Her future salary increases are expected to match any increases in living expenses on a pretax basis. They do not adjust for inflation in the return calc. I believe this is because the IRA contribution of 12000 is fixed and will not change with inflation. This doesn’t exactly make sense because the 12,000 difference will increase as a result of inflation. However, they state that this 12000 contribution will be fixed forever… fixed payment = no adjustment for inflation at the end.
2009: Tracy’s “Pension income from both Patricia’s company plan and the government pension plan is fully indexed for inflation”. There is a difference in the pension income and expenses, which will grow over time with inflation. This makes me think add inflation at the end. They also mention maintaining the real purchasing power several times in this case. The return calc includes inflation.
In 2008 part 1: The mortgage payment is fixed at 55k and will not increase with inflation. However, “Their salaries are expected to continue to cover their living expenses to retirement.”  There is no difference between their A/T salary and their expenses, so this will not grow and the 55k morgage will not grow. Yet they adjust for inflation in the return calc…. They say that they want to maintain the inflation-adjusted value of the portfolio several times in the case.