Suppose the 8 percent investment of the previous problem is taxable rather than tax-deferred. What will be the after-tax value of his $10,000 investment after five years (assuming annual compounding)?
A) $10,680
B) $11,765
C) $13,895
D) $14,693
E) $15,528

Question

Quizplus · Accepted Answer

The after-tax value is calculated by considering the tax on the interest earned each year. Assuming a tax rate of 25%, the effective annual interest rate becomes 8% * (1 - 0.25) = 6%. Using the formula for compound interest: Future Value = Principal * (1 + rate)^years, we get $10,000 * (1 + 0.06)^5 = $13,382.26, which is closest to option C.

Suppose the 8 Percent Investment of the Previous Problem Is