Required return inclusive of inflation for next year

[archived_user]

hi all,
the question about the required return calculation seems to come often in the past exams and i think that i am missing something.
can you please help me with the below?
Here is the question (I am extracting it from 2011 Essay but simplifying it):

• Asset base is USD 4.3M
• living expenses of this year 250k
• inflation is 3%

the aim is to calculate the required nominal return next year.
what i did is the following:

1. calculate the return from a real value perspective 250 / 4.3M = 5.8%
2. add the inflation component to get the nominal return: 4.8 + 3 = 7.8%

the correction seems to add one step before my step one which is inflating the expenses (250 x 1.03) and then they follow the rest of the logic.
i don’t understand why we use the inflation two times. isn’t it there a double counting?
thanks

 

[archived_user]

You can refer to the similar question in the 2017 AM paper. CFA gave a full explanation on your exact question.