Question

Irene is saving for a new car she hopes to purchase either four or six years from now. Irene invests $11,000 in a growth stock that does not pay dividends and expects a 6 percent annual before-tax return (the investment is tax deferred). When she cashes in the investment after either four or six years, she expects the applicable marginal tax rate on long-term capital gains to be 25 percent. (For all requirements, do not round intermediate calculations. Round your final answers to nearest whole dollar amount.) a. What will be the value of this investment four and six years from now? Investment Value Four years Six years b. When Irene sells the investment, how much cash will she have after taxes to purchase the new car (four and six years from now)? After-tax cash Four years Six years

Answer 1

A)	Value of this investment Four and Six years from now :
		Investment Value
	Four years	$ 13,887
	Six years	$ 15,603
B)	How much cash will she have after taxes to purchase the new car (four and six years from now )
		After-tax cash
	Four years	$ 13,165
	Six years	$ 14,452

EXPLANATION :

A)	Value of this investment Four and Six years from now :
	Value of this investment Four from now :
	Irene investment will be worth After 4 years $ 13,887
	{$ 11,000* (1+0.06)4 }
	Value of this investment Six from now :
	Irene investment will be worth After 6 years $ 15,603
	{$ 11,000* (1+0.06)6 }
B)	How much cash will she have after taxes to purchase the new car (four and six years from now )
	After 4 years, Irene will be pay taxes of 25 % on her investment returns of $ 2,887 {$13,887 -$11,000}
	Leaving her with investment returns after taxes of $ 2,165    {(1-0.25)* $2,887 }
	Hence combined with her original $ 11,000 investment , will leave her with $ 13,165 {11000+2165}
	to purchase the car
	After 6 years, Irene will be pay taxes of 25 % on her investment returns of $ 4,603 {$15,603 -$11,000}
	Leaving her with investment returns after taxes of $ 3,452   {(1-0.25)* $4,603 }
	Hence combined with her original $ 11,000 investment , will leave her with $ 14,452 {11000+3,452}
	to purchase the car