If the building owner is in the 28 percent tax bracket, determine the actual value of his $10,000 investment considered in Example 3.1 if the economy experiences an annual inflation rate of 4 percent.

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Accepted Answer

The composite interest rate can be determined using Eq. (3.15):

[latex]θ=\frac {(1-t) i-λ}{1+λ}=\frac {(1-0.28)* 0.07-0.04}{1+0.04}=0.01[/latex]

sing Eq. (3.10) with P = $10,000 and N = 10, the investment will accumulate to the total amount F:

[latex]F=P(\frac {1+i}{1+λ})^{N}=P(1+\frac {i-λ}{1+λ})^{N}[/latex]

F = $10,000 * [latex](1+ 0.01)^{10}[/latex] = $11,046

Question 3.3: If the building owner is in the 28 percent tax bracket, dete...

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