Liquidity Needs: include inflation or not? increase, return, included

RoastBeef

2009 Exam 1C: no mention of increasing for inflation

2009 Exam 3C: inflation is excluded from the calculation (despite being included in the return calculation)

2007 Exam 1D: says that liquidity needs are 200,000 per year and increase by inflation each year

Analyze_This

so is the best way to answer liquidity questions to say they need X amount each yr in real terms

ohai

Don't know if it's best or not, it is just my logical way around the fact that i have seen them mention inflation sometimes, and not others. If you say they need 5% in real terms, they can't knock you for leaving out inflation because you said "real return".

In reality i highly doubt you could be considered wrong to say liquidity requirement includes inflation. It should really mirror the return requirement most of the time.

Chuckrox

Inflation is included in return requirement if they ask for nominal return. It is excluded from liquidity calculation.

2007 Exam, the reason why it says increasing by inflation each year is that imagine this year you want to purchase $1000 worth of cheese. you will need $1000 available this year to purchase it. If you want to purchase the same amount of cheese next year, inflation will increase the cost to say $1,050 so you will need $1,050 next year.

mar350

my way around this is simply to specify "real expenditures of x"

That cannot be refuted.

bkballa

so by that same logic, why is inflation not included in the first 2 instances? if the foundation (question 3c) is expecting 3% inflation, they will need more and more money each year.

unless--when asked for liquidity constraint does it imply only for this yr?