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 per cent 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 per cent. 

(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

About Raj Maurya

Avatar for Raj Maurya

Check Also

Profit and loss account

NPV Calculation Example

NPV Calculation Example Watson manufacturing has an opportunity to invest $96,000 in a new machine. …

pros and cons of IFRS

Systematic and Unsystematic Risks

The deviation from the anticipated return is caused by is explained by 2 levels of …

price-yield-relationship

Price Yield Relationship – Concept

Price Yield Relationship A basic property of a bond is that its price varies inversely …

Leave a Reply

Your email address will not be published. Required fields are marked *