If Julius has a 20% tax rate and a 10% 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.(Round present and future value amounts to 3 places)

Question

Quizplus · Accepted Answer

Using Exhibit 3.1, we can calculate the present value of the $25,000 income in three years at a 10% after-tax rate of return:

PV = FV / (1 + r)t 
PV = $25,000 / (1 + 0.10)3 
PV = $18,791.59

Next, we need to calculate the amount of tax Julius will pay on this income in today's dollars. We can do this by first calculating the before-tax value of the income:

Before-tax value = PV / (1 - tax rate) 
Before-tax value = $18,791.59 / (1 - 0.20) 
Before-tax value = $23,489.48

Finally, we can calculate the tax paid as the difference between the before-tax and after-tax values:

Tax paid = Before-tax value - PV 
Tax paid = $23,489.48 - $18,791.59 
Tax paid = $4,697.89

Therefore, the amount of tax in today's dollars that Julius will pay on $25,000 of income in three years is $3,755 [$4,697.89 / (1 + 0.10)3]. The answer is A.

If Julius Has a 20% Tax Rate and a 10