Tax Deferred Account - After-Tax Wealth

CFA Level III Portfolio Management
#1

Reading 22 pg 293 Example 6:

CFA reading says to “compute after-tax wealth (FV) of $1mn today invested for 20 years in tax deferred account. pre-tax annual return is 10%, flat tax of 20%”

CFA calculation: FV = 1mn [(1+0.10)^20 * (1-0.2)] = $5,382,000

This seems wrong to me, they are taxing the cost basis with this formula.

Shouldn’t it be FV = 1mn* 1.10^20 = 6,727,500 → then FV = 1mn + (6,727,500-1,000,000)*.8 = 5,582,000

?

#2

I haven’t looked at this specific question, but I suspect that the original $1 million wasn’t taxed before it was deposited in this account.

#3

yeah the example doesnt say that and it would be inconsistent with other parts of the example. I’ll just report it, has to be wrong