On p.288 and p.289 of schewser notes (Book 1):

FVIF_{T} = [(1+R_{ART})^{N}(1-T_{ECG})+T_{ECG}-(1-B)T_{CG}]

Guys, first, i dont get where the +T_{ECG} is coming from.

Second, can you please help explain the below:

It says in the example on p.289: **“Remember, however, that we paid capital gains on 20% of the portfolio return each year, so we have to add back the effective capital gains rate, 0.0807, on the principal.”**

While I don’t have the Schweser materials - I’ll see if this helps…

The FV factor is just the multiple (think about the future value of $1 when we calculated forward factors on L2) for the principal. When you multiply the principal by the FV factor, you get a future value of the principal. You do not pay taxes on that entire amount. The cost basis (the invested principal) is CG-tax-exempt since it is the number that you started with, and is why it is added back into the formula.