If Rudy has a 25% tax rate and a 6% after-tax rate of return, a $30,000 tax deduction in four years will save how much tax in today's dollars (rounded)?
A) $30,000
B) $7,500
C) $28,290
D) $5,940
E) None of these

Question

Quizplus · Accepted Answer

First, we need to calculate the future value of the $30,000 tax deduction in four years at a 6% rate of return. Using a future value calculator, we get: $30,000 x (1 + 0.06)^4 = $37,710.55
Now we need to calculate how much tax Rudy would have to pay on the $37,710.55 at a 25% tax rate. $37,710.55 x 0.25 = $9,427.64
Finally, we need to calculate the present value of the tax savings in today's dollars. Using a present value calculator, with a 6% rate of return for the past four years, we get: $9,427.64 / (1 + 0.06)^4 = $5,940. Therefore, the answer is D.

If Rudy Has a 25% Tax Rate and a 6