Doubt in 2009 paper Q1A

In the same question, CFAI solution finds the pre tax return requirement and then adds the inflation rate,which is contrary to the common way of adding inflation first and then finding the pre tax value.How can we decide which approach is required?

Found the elaborate explanation, http://www.analystforum.com/forum/s/cfa-forums/cfa-level-iii-forum/91318764

can you show us the question @sakrutimehta?

In the 2009 exam question, it seems that the account in which the investments are held is a deferred tax account and hence only withdrawals are taxed at 20%, therefore the unusual way of doing the pretax first and then adding the inflation. explained here http://www.finquiz.com/downloads/l3ss4los14.pdf
Funny, I was searching for the same reasoning yesterday and I did find a elaborate explanation on analystforums.com will try to find the link in my browser history.

To answer @lakshya25’s question about calculating returns geometrically, the reasoning is, since endowments’ and foundations’ Time Horizon is perpetual in nature, the difference between additive method and geometric method will cause a huge gap down the years.

I know they are not going to exactly earn the same return every year, but lets say they have a “Immunization God” who immunizes their portfolio and provides them with the exact same return every year, the difference in both the methods will matter.

Thanks @nimeshgala. Goodluck for the exam :-bd

@sankrutimehta no probs 🙂 You print out each and every paper for solving?

@zee can you clarify the doubt that me and @lakshya25 have?

@lakshya25 I’m not sure on that either but most of the answers seem to calculate the pretax return and then add inflation. Also, do you usually calculate returns geometrically for endowments and foundations? @Sophie?

@sankrutimehta Its 20%. It says on the second page “Briscoe expects a tax rate of 20% to apply to the Tracys’ withdrawals from the investment account.”