Question

ENGINEERING ECONOMY

As an investment which he intends to keep for 10 years, a man bought a lot for P15,000 cash. He wants a 12% after tax rate of return over and above the 8% inflation rate. If capital gains tax is 16% of his profit upon selling the lot, at what price must he sell the lot at the end of 10 years.

Answer 1

Initial investment is of 15,000 and Considering that the investors wants a return of 12% after fax when capital gains tax is equal to 16% on his profit selling and over and above the inflation rate of 8%.

So the total returns that the investment must offer must be equal to,

= 8% + 16% + 12%

= 36%

Or

= 0.08 + 0.16 + 0.12

= 0.36

And formula for profit return is,

(P2 - P1)/P1  

Where P2 = Selling price which we need to calculate

P1 = buying price which is given as 15,000

So putting in the values we get,

(P2 - 15,000)/15,000 = 0.08 + 0.16 + 0.12

P2 - 15,000 = 15,000(0.36)

P2 - 15,000 = 5,400

P2 = 15,000 + 5,400

P2 = 20,400

So the selling price of the lot must be 20,400 in order to generate after tax profit of 12% over and above the rate of inflation of 8%.