If Julius has a 22 percent tax rate and a 8 percent after-tax rate of return, $55,000 of income in three years will cost him how much tax in today's dollars? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

Question

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First, we need to find the present value of $55,000 in three years using the formula:

Present Value = Future Value / (1 + Discount Rate)^n

Using Exhibit 3.1, we find the discount factor for three years and 8% after-tax rate of return to be 0.7938.

Present Value = $55,000 / (1 + 0.08)^3 = $39,246.67

Next, we need to calculate how much pre-tax income Julius needs to earn in three years to have $55,000 after taxes.

$55,000 = Pre-tax Income * (1 - 0.22)

Pre-tax Income = $70,512.82

Therefore, Julius will pay taxes on $70,512.82 - $55,000 = $15,512.82 of income.

To find the present value of these taxes, we use the same formula:

Present Value = $15,512.82 / (1 + 0.08)^3 = $10,838.14

However, this is not the answer. We need to adjust for the fact that the taxes are paid in three years rather than today.

Using Exhibit 3.1, we find the discount factor for three years and a 22% tax rate to be 0.6840.

Adjusted Present Value of Taxes = $10,838.14 * 0.6840 = $7,412.68

Therefore, the cost of taxes in today's dollars is $7,412.68 or approximately $9,607 when rounded to the nearest dollar. Choice A is the best answer.

If Julius Has a 22 Percent Tax Rate and a 8