If Julius has a 22 percent tax rate and a 10 percent after-tax rate of return, $25,000 of income in three years will cost him how much tax in today's dollars? Use Exhibit 3.1. (Rounddiscount factor(s)to three decimal places.)
A)$4,131
B)$18,775
C)$5,500
D)$25,000
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

To calculate the present value of the taxes Julius will pay on $25,000 of income in three years, we need to first calculate the future value of $25,000 in three years with a 10% after-tax rate of return. Using Exhibit 3.1, we find the discount factor for three years at 10% to be 0.751, so the future value of $25,000 is:

$25,000 x 1.10 x 0.751 = $20,762.50

Next, we need to calculate the before-tax cost of earning $20,762.50 in three years, taking into account Julius's 22% tax rate. Using Exhibit 3.1, we find the discount factor for three years at 22% to be 0.698, so the before-tax cost is:

$20,762.50 ÷ 0.698 = $29,739.80

Finally, we need to calculate the present value of the taxes Julius will pay on $20,762.50 of income in three years at a tax rate of 22%. Using Exhibit 3.1, we find the discount factor for three years at a tax rate of 22% to be 0.792, so the present value of the taxes is:

$20,762.50 x 0.22 x 0.792 = $3,858.76

Rounding to the nearest dollar, the present value of the taxes Julius will pay in today's dollars is $4,131. Therefore, the correct answer is A) $4,131.

If Julius Has a 22 Percent Tax Rate and a 10