How to calculate nominal after-tax rate of required return (IPS individual)

[Nhgiang_cva]

In 2013 AM exams, question 1A, which requires to calculate “Nominal after-tax required rate of return for the coming year”.
As I thought, it should have been:
Investible Assets = USD 10,750,000. This is ok and consistent with the answer.
But the strange part is:
I thought: Cash needs next year=300,000 (real value)
Answer: Cash need next year = 300,000x(1+inflation rate)=307,500 (nominal value)
Then the nominal after required return is:
I thought: 300,000/10,750,000= 0.0279 and then (1+0.0279)x(1+inflation rate)= final answer.
Answer : 307,500/10,750,000=0.025 and then (1+0.025)x(1+inflation rate)= final answer.
My question is: why the total living expense next year need to be adjust to inflation to find the real required return, which is adjusted one more time for inflation.
I thought we should use real amount to find real required return.
Anyone has an idea on this?

 

[havlax03]

Are you sure the expenses weren’t for the year prior and may increase with inflation?

 

[DickeyFuller]

The 300k is current year living expense. So you need to adjust for inflation for next year.

 

[Miamia]

I have this same question w Nhgiang. CFAI text book shows at least 1 example using real cash flow instead of nominal in this example (ie living expense of the coming year is not adjusted with inflation). Anyone can shed some light?

 

[FrankCFA]

Exam question said living expenses last year were USD 300,000. Thus, coming year needs to adjust by inflation rate.

 

[Miamia]

Sure. The issue is using nominal cashflow to derive at real rate, which is different from what we know that nominal (real) CF discounted at nominal (real) rate. Could you elaborate?