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If Joe invested $3,250 for 5 years at a rate of 6%, and his marginal tax bracket is 35%, what would his accumulation be after taxes?
There's more than one way to shear a sheep. And here's two of them. The first uses the online algebraic version. The second uses the time value of money (TVM) keys. Both approaches result in the correct answer to the question... $3,935.15.
The online algebraic version
Step one
Find the after-tax compounded rate, which is one minus the tax rate. Therefore, “i” is .06 x (1 – .35) or .039 or 3.9%.
Step two
The calculation is key $3,250; press “enter”; key 1.039 (you need to add one to the step one adjusted after-tax rate); press “enter”; key in 5 (this is the compounding period); press “y^x” (found below the “n” key on the HP-12C, which indicates raising to the 5th power); you will see 1.2108 in the display; then press”x” (this is to multiply $3,500 x 1.2108) to arrive at $3,935.15.
Using the TVM keys
- n = 5
- i = 3.9 [(6% x (1 – 35%)]
- PV = ($3,250) Note: Use the CHS key to show a cash outflow.
- Solve for FV = $3,935.15
