Irene is saving for a new car she hopes to purchase either two or four years fro

Question

Irene is saving for a new car she hopes to purchase either two or four years from now. Irene invests $21,250 in a growth stock that does not pay dividends and expects a 8 percent annual before-tax return (the investment is tax deferred). When she cashes in the investment after either two or four years, she expects the applicable marginal tax rate on long-term capital gains to be 25 percent.

A. What will be the value of this investment two and four years from now?

Value of the investment in 2 years $
Value of the investment in 4 years $

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

Cash available in 2 years $
Cash available in 4 years $

Explanation / Answer

A)
Value of the investment in 2 years = 21,250*(1+0.08)^2 = $24,786
Value of the investment in 4 years = 21,250*(1+0.08)^4 = $28,910.39

B) Tax rate = 25% on the investment returns
Cash available in 2 years = (1-0.25)*(24,786 - 21,250) + 21,250 = $23,902
Cash available in 2 years = (1-0.25)*(28,910.39 - 21,250) + 21,250 = $26,995.29

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.