How much principal must be invested today for 5 years, during a period when the

Question

How much principal must be invested today for 5 years, during a period when the inflation rate is 2%, if the investor is in the 25% Federal and 4% State tax bracket for ordinary income but taxed at a 15% Federal rate for dividend income, to accumulate $10,000 in today's dollars, in the following cases: The principal is invested in a certificate of deposit that pays annual interest of 6%? The principal is invested in a stock that retains its share price and pays an annual dividend of 6%? The principal is invested in a municipal bond (on which no state tax is levied) that pays annual interest of 5%?

Explanation / Answer

Alternative 1 Year amount PVF Present Value Tax Net Amount Accumulaated income 0          8,620    1.00                   8,620             -                 8,620                                    8,620 1             517    0.80                       414            17                   397                                    9,017 2             517    0.79                       408            16                   392                                    9,409 3             517    0.50                       259            10                   248                                    9,657 4             517    0.39                       201               8                   193                                    9,850 5             517    0.30                       156               6                   150                                  10,000 Amount to be invested is $ 8620 /- Alternative 2 Year amount PVF Present Value Tax Net Amount Accumulaated income 0          8,778    1.00                   8,778             -                 8,778                                    8,778 1             517    0.80                       414            62                   352                                    9,130 2             517    0.79                       408            61                   347                                    9,477 3             517    0.50                       259            39                   220                                    9,696 4             517    0.39                       201            30                   171                                    9,867 5             517    0.30                       156            23                   133                                  10,000 Amount to be invested is $ 8778 /- Alternative 3 Year amount PVF Present Value Tax Net Amount Accumulaated income 0          8,850    1.00                   8,850             -                 8,850                                    8,850 1             431    0.80                       345            14                   331                                    9,181 2             431    0.79                       340            14                   326                                    9,507 3             431    0.50                       216               9                   207                                    9,714 4             431    0.39                       168               7                   161                                    9,875 5             431    0.30                       130               5                   125                                  10,000 Amount to be invested is $ 8850 /-

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