The country of Aquilonia has a tax system identical to that of Canada. Suppose s

Question

The country of Aquilonia has a tax system identical to that of Canada. Suppose someone in Aquilonia bought a parcel of land for $10000 in 1960 when the price index equalled 100. In 2002, the person sold the land for $100000, and the price index equalled 500. If the person must pay 20 percent of any capital gain in taxes, which of the following is the after-tax real capital gain(in 2002 dollars) on the land?

a. $72000

b. $62000

c. $32000

d. $6400

Can someone show step by step how to solve this question?

I use 10000-5*10000=50000----capital gain

50000*(1-0.2)=40000----after-tax real capital gain

but it does not have this option...

Explanation / Answer

Well, because the price index is just a ratio, you can say that the value of the dollar in 2002 is 5 times that of the dollar in 1960.

So $10,000 in 2002 would be worth 10000x5, or $50,000.

So, because the land sold for $100,000,

Real capital gains = 100,000 - 50,000 - Actual investment = $ 40000

Less taxes of 20 % = 0.2*40,000 = $ 8000

After - Tax Real Capital Gain = 40,000 - 8000 = $ 32,000

ans is C

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