If Joel earns a 6 percent after-tax rate of return, $26,000 received in two years is worth how much today? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

Question

Quizplus · Accepted Answer

Using Exhibit 3.1, we can see that the discount factor for a 6% after-tax rate of return over two years is 0.869. Therefore, the present value of $26,000 is:

$26,000 / 0.869 = $29,921.35 (rounded to the nearest penny)

However, the question asks for the after-tax rate of return, so we need to adjust for taxes. If we assume a tax rate of 25%, the before-tax rate of return would be:

6% / (1 - 0.25) = 8%

Using the appropriate discount factor from Exhibit 3.1 (0.857), the present value of $26,000 is:

$26,000 / 0.857 = $30,311.07 (rounded to the nearest penny)

Therefore, the closest answer choice is (C) $23,140.

If Joel Earns a 6 Percent After-Tax Rate of Return