Question

Juanita earns $56,000 a year before-tax, spends $31,500 per year on consumption, and saves the rest at the end of the year. She also has $14,400 in her savings account. She wants to retire in 25 years with a million dollars. Her average tax rate is 25%, and her marginal tax rate is 35%. What before-tax rate of return does she need to make on her investments in order to achieve her goal?

a. 8.99%

b. 13.71%

c. 5.13%

d. 6.49%

e. None of the above.

Answer 1

By trial and error method in excel is close to 10.27% by using following amounts:

Earnings before tax	$                                          56,000
Less: tax @ 25%	$                                          14,000
Earnings after tax	$                                          42,000
Less: Consumption	$                                          31,500
Savings per year	$                                          10,500

So correct answer is 10.27%

So the answer is

e.) None of the above

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