Problem NO: 27

Irene is saving for a new car she hopes to purchase either four or six years from now. Irene invests $10,000 in a growth stock that does not pay divid

Irene is saving for a new car she hopes to purchase either four or six years from now. Irene invests $10,000 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. 

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a) What will be the value of this investment four years from now? Six years from now?

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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)?

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