2013 AM Exam Q1 Part A ii

[andrewf125]

Don’t we have to take into consideration the current year’s net cash outflow of -$212,500 and subtract it from the asset base for next year?
The breakdown of the net cash outflow is:
Income 125,000 - Taxes 37,500 - Expense 300,000 = -212,500
So the asset base for next year will be 11,000,000 + -212,500 = $10,787,500

 

[iWbAcfaCH]

I’m going to go out on a limb here and say no, because the portfolio should have earned enough interest to cover that expense. Required Return + Inflation = Capital Preservation.