Irene is saving for a new car she hopes to purchase either five or eight years from now

Irene is saving for a new car she hopes to purchase either five or eight years from now. Irene invests $24,750 in a growth stock that does not pay dividends and expects a 9 percent annual before-tax return (the investment is tax deferred). When she cashes in the investment after either five or eight years, she expects the applicable marginal tax rate on long-term capital gains to be 25 percent. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)


a.What will be the value of this investment five and eight years from now?

VALUE OF INVESTMENT IN 5 YEARS____?

VALUE OF INVESTMENT IN 8 YEARS___?

b.When Irene sells the investment, how much cash will she have after taxes to purchase the new car (five and eight years from now)?

CASH AVAILABLE IN 5 YEARS_____?

CASH AVAILABLE IN 8 YEARS____?

Solution

a)Value in 5 years = 38,081

Value in 8 years = 49,316

b) Cash available in 5 years = 34,748

Cash available in 8 years = 43,175

Explanation:

a) Value in 5 years = 24,750 x (1+0.09)5 = 38,081

Value in 8 years = 24,750 x (1+0.09)8 = 49,316

b) Cash available in 5 years = 24,750 + ((38,081 – 24,750) x (1-0.25)) = 34,748

Cash available in 8 years = 24,750 + ((49,316 – 24,750) x (1-0.25)) = 43,175

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