Answer:
a. What is the after-tax cost if she pays the $20,000 bill in December?
= $20,000 x (1 - 32%) = $13,600
b. What is the after-tax cost if she pays the $20,000 bill in January?
total after tax cost (including investment revenue):
= $20,000 x (1 - 35%) = $13,000
= -$20,000 x 12% x 1/12 x (1 - 35%) = -$130
= $12,870
c. Should Reese pay the $20,000 bill in December or January?
January, since the after tax cost is lower
d. What is the after-tax cost if she expects her marginal tax rate to be 24 percent next year and pays the $20,000 bill in January?
= $20,000 x (1 - 24%) = $15,200
= -$20,000 x 12% x 1/12 x (1 - 24%) = -$152
= $15,048
e. Should Reese pay the $20,000 bill in December or January if she expects her marginal tax rate to be 32 percent this year and 24 percent next year?
December, since the after tax cost is lower
