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.
a) What will be the value of this investment four and six years from now?
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)?