Let’s return to Example 8. After reading this section, Mr. Lohrmann decided that he was not being fair to the fund manager by including the asset management fee and other expenses because the small size of the fund would put it at a competitive disadvantage. He learns that the fund spends a fixed amount of EUR500,000 every year on expenses that are unrelated to the manager’s performance. Mr. Lohrmann has become concerned that both taxes and inflation may reduce his return. Based on the current tax code, he expects to pay 20 percent tax on the return he earns from his investment. Historically, inflation has been around 2 percent and he expects the same rate of inflation to be maintained. 

1. Estimate the annual gross return for the first year by adding back the fixed expenses. 

2. What is the net return that investors in the Rhein Valley Superior Fund earned during the five-year period? 

3. What is the after-tax net return for the first year that investors earned from the Rhein Valley Superior Fund? Assume that all gains are realized at the end of the year and the taxes are paid immediately at that time. 

4. What is the after-tax real return that investors would have earned in the fifth year?