2010 AM Question 1 B

The return requirement calculation-- When I worked it out I calculated the cash outflow as (140,000*(1-0.25)-96000-12000=3,000) But the guideline answer grosses up the living expenses 96,000/(1-0.25) to calculate pre tax income requirement. Can someone guide me on where I went wrong? Why would I gross up the living expenses when I have pre-tax income and I’ve seen everywhere that you deduct tax to see how much of after tax salary is available for other cash flows?

Guys please help!

12,000 contribution is pre-tax while 96,000 expenses are post taxes TDA is Tax Defered Account that is you pay for it from your gross income before tax deductions (this money will be taxed in future when you withdraw) so calculations should be (140,000-12,000)(1-0.25)-96,000 = 0

Ohhh! Ok! Didn’t notice that! Thanks a ton! This question was driving me mad!!!