Quick question - IPS and Inflation before, return, question, required

Roflnadal

If you are required to calculate pre-tax return, do you add inflation before or after you perform the return/1-tax rate?
Thanks

therecruit

wow. sorry florinpop. you are absolutely right. i’m not sure what i was thinking. you added the inflation to the pretax return so it could be taxed. there is nothing to be confused about with the ingram case. sorry for causing the confusion. i think i’ve hit my limit.. going into the gips ethics meditative state. good luck on the test..

cchang

upon thinking about this some more, i think you are right, florin. thanks. i guess i was thrown off by the ingram case. in that case, didn’t they get the pretax retun then add the inflation rate on top of it?

defour44

yes I would do first one

stockjaguar

had to get out of the house. somehow, this is my fault, this thread got confusing. i’m not actually sure that florin and i are even disagreeing.
at the risk of making it more confusing.
say you have an after tax required return, that has not included an inflation component. say 4% is the after tax requirement. tax rate is 20%.
so your pretax return requirement is 5%.
if inflation is 2%, you are saying you would go,
(4%+ 2%)/.8 = 7.5%?
and i would go, 4%/.8 = 5% then add 2% inflation to get 7%.
is this what we are saying?

JGovender

Ok, so in other words, add inflation first, then calculate before tax nominal return.
Thanks

tikfed

cfasf1 - the rationale - since that is your question would be that inflation is taxed as well
if I make 100k in nominal terms - that is what I get taxed on, I don’t get taxed on 90k because 10% was inflation

jcfa2011

but to the original question posted by maagian. in the ingram’s case, they add inflation after they’ve already got the pretax return.

ohai

for the long term return - they inflated next year payment - they calculated the return and then added inflation

cityboy

sorry florin, i guess you were referring to your own question..