An individual in the 36 percent tax bracket has $20,000 invested in a tax-exempt account. If the individual earns 10 percent annually before taxes and inflation is 3.0 percent per year, what is the real value of the investment in 10 years?
A) $31,000
B) $33,200
C) $38,614
D) $39,343
E) $47,823

Question

Quizplus · Accepted Answer

First, we need to calculate the after-tax annual return: 
10% x (1 - 0.36) = 6.4%

Then we can use the following formula to calculate the real value of the investment after 10 years:

Real value = (1 + After-tax return) ^ Number of years x Initial investment / (1 + inflation) ^ Number of years

Real value = (1 + 0.064) ^ 10 x $20,000 / (1 + 0.03) ^ 10 = $38,613.66

Therefore, the best choice is C, which is the closest option to the calculated real value.

An Individual in the 36 Percent Tax Bracket Has $20,000