Question

1. If Joel earns a 11 percent after-tax rate of return, $10,000 received in two years is worth how much today? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.)

Multiple Choice

• $10,000.

• $8,990.

• $8,120.

• $11,100.

• None of the choices are correct.

2. If Lucy earns a 7 percent after-tax rate of return, $20,000 received in four years is worth how much today? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.)

Multiple Choice

• $20,000.

• $18,624.

• $21,909.

• $15,260.

• None of the choices are correct.

3. If Julius has a 32 percent tax rate and a 12 percent after-tax rate of return, a $24,000 tax deduction in two years will save how much tax in today's dollars? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.)

Multiple Choice

• $24,000.

• $6,121.

• $19,128.

• $7,680.

• None of the choices are correct.

4. If Thomas has a 37 percent tax rate and a 11 percent after-tax rate of return, $60,500 of income in five years will cost him how much tax in today's dollars? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.)

Multiple Choice

• $60,500.

• $22,385.

• $37,620.

• $13,274.

• None of the choices are correct.

Answer 1

Solution to PART-1

The Present value of $10,000 received in two years = Future Value x [1/(1 + r)ⁿ]

= $10,000 x [1 / (1 + 0.11)²]

= $10,000 x [1 / (1.11)²]

= $10,000 x [1 / 1.2321]

= $10,000 x 0.812

= $8,120