At the beginning of year 1,Sandeep invests $10,000 in a money market fund that pays a 3% annual return before taxes.Sandeep's marginal tax rate is 25%,and he allows the after-tax earnings to remain in the money market fund.That is,he withdraws only enough cash to pay the taxes on the earnings.What is his after-tax accumulation at the end of year 2?
A)$10,455
B)$10,609
C)$10,690
D)None of the above

Question

Quizplus · Accepted Answer

The correct answer is A.The after-tax accumulation at the end of year 2 is $10,455. This is calculated as follows:Year 1:Interest earned = $10,000 * 3% = $300Taxes on interest = $300 * 25% = $75After-tax interest = $300 - $75 = $225Ending balance = $10,000 + $225 = $10,225Year 2:Interest earned = $10,225 * 3% = $306.75Taxes on interest = $306.75 * 25% = $76.69After-tax interest = $306.75 - $76.69 = $230.06Ending balance = $10,225 + $230.06 = $10,455.06

At the Beginning of Year 1,Sandeep Invests $10,000 in a Money