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"You are investing $6,000 immediately in a stock that you will keep for 13 years. At...

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"You are investing $6,000 immediately in a stock that you willkeep for 13 years. At the end of 13 years, the stock will be worth$16,813 with a probability of 0.48 and worth $22,785 with aprobability of 0.52. When you sell the stock, you will need to paytaxes on the profit earned from selling the stock (i.e., taxes onthe difference between the selling and buying prices of the stock).The tax rate will be 8% with a probability of 0.8 or 16% with aprobability of 0.2. Your MARR is 4.7% What is the variance of thenet present worth from investing in the stock?"

Answer & Explanation Solved by verified expert
4.3 Ratings (785 Votes)

(a) (b) (c = b - a) (T1) (T2) d = (c*T1*P1)+(C*T2*P2) (e = d - a) f = e/(1+4.7%)^13 (f - a)
Initial investment Amount after 13 years Profit Tax with prob. P1 = 0.8 Tax with prob. P2 = 0.2 Tax Net profit PV of Net profit NPW
                6,000               16,813               10,813 8% 16%             1,038.05           9,774.95           5,380.32            (619.68)
                6,000               22,785               16,785 8% 16%             1,611.36         15,173.64           8,351.85           2,351.85
(p) (a) (b)
Probability NPW Weighted NPW p*(a-m)^2
48%            (619.68)            (297.45)      1,146,068.72
52%           2,351.85           1,222.96      1,057,909.59
(m)               925.52      2,203,978.31

Variance of Net Present Worth (NPW) = 2,203,978.31
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Transcribed Image Text

"You are investing $6,000 immediately in a stock that you willkeep for 13 years. At the end of 13 years, the stock will be worth$16,813 with a probability of 0.48 and worth $22,785 with aprobability of 0.52. When you sell the stock, you will need to paytaxes on the profit earned from selling the stock (i.e., taxes onthe difference between the selling and buying prices of the stock).The tax rate will be 8% with a probability of 0.8 or 16% with aprobability of 0.2. Your MARR is 4.7% What is the variance of thenet present worth from investing in the stock?"

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