Question

You made a $500,000 loan at 10% interest when the CPI was 120. The loan was repaid five years after that, when the CPI was 130. Assume the tax on interest income is 20%. Calculate the tax you owe the government.

Answer 1

10000 before inflation, 10833 after inflation

Step-by-step explanation:

P = 500000

1 = 10%

Interest calculated = 500000x0.1

= $50000

20%x50000 = $10000

Rate of inflation = (130-120)/120 = 0.833

0.833x100%

= 8.333%

What has to be paid to government

= 10000+(8.333*10000)

= 10833

Before inflation, you owe $10000

After inflation you owe $10833