2007 Paper AM – Q.2 Ingrams IRR calc for nom return

Question

Hi there,

Cant understand IRR calc for nominal req rate of return.

Arent PV (the current portfolio) 4m, and payments both negative inputs, as PV always negative ?? and withdrawals / pmt 205,000 going out from it

I worked out the answer just using PV as neg, leaving Payments and FV positive as this is what you want to be left with, just to see what the result was and you get i/y 4.84% - same answer.

2 options given in answer key:
1) N = 35   PV 4m  pmt -205,000  FV -3m, I/y = 4.84%
Pmt and FV neg here. dont understand.

2) N = 35   PV -4m  pmt 205,000  FV -3m, I/y = 4.84%
Both PV and FV neg here. dont understand.

Thanks very much.

vincentt · Answer

Hi @adossa3‌ it seems your question isn't related to 2007 paper q2 at all but a general PV question, not sure if i understood correctly?

2) N = 35 PV -4m pmt 205,000 FV -3m, I/y = 4.84%
Both PV and FV neg here.

For your #2 when you compute I/Y the answer seem to be 0.678% and not 4.84%

adossa3 · Answer

Hi Vincentt,

Yes, its 2007 Q1 - having trouble pasting from the exam PDF here.

the ingrams have 4m as current portf. they need to leave 3m in current dollars 35 years down the road, and their inflation adjusted living expenses are 200,000 x 1.025 = 205,000 for the next year.

2 answer options given in answer key:
1) N = 35 PV 4m pmt -205,000 FV -3m, I/y = 4.84%
Pmt and FV both neg inputs here. dont understand.

is it because they are both portfolio OUTFLOWS that the sign is neg ?

2) N = 35 PV -4m pmt 205,000 FV -3m, I/y = 4.84%
Both PV and FV neg inputs here. dont understand.
Nominal pre-tax return to be calc.

Answer:
Real req return 4.84% 
Inflation adjustment 2.5%
Nominal pre-tax return 1.0484 x 1.025 = 1.07461 or 7.46%

Many thanks