In the questions below, assume that a taxpayers preference (decision) is based on what will give him or her the highest after-tax accumulation per after-tax dollar invested.

Please distinguish your final answer to each part in a clear way (e.g., with highlighter, circled, double-underlined, etc.).

Grading rubric for each problem:

All possible points if final answer correct and you show your work to support the answer.

s possible points if incorrect final answer but you show your work to support incorrect answer.

possible points if you just show correct final answer but no work to support the correct answer.

0 points if you show incorrect answer and have no work shown to support the incorrect answer.

Ayses salary after-tax is $200,000. She wants to invest $100,000 of this (or half) of these after-tax dollars to increase her savings for retirement. She is deciding whether to invest this money in either a traditional deductible IRA or a Roth IRA in the current year and hold over a 15 year investment horizon. Both types of IRAs earn a pre-tax rate of return of 7% per year. When helping her make this decision, ignore limits on how much the taxpayer can contribute each year, age restrictions, and phase-outs based on the taxpayers income and filing status. HINT: Dont forget how changes in tax rates over time alter the SV VI formula in Sec. 3.2.

(20 points possible): If all tax rates (ordinary, capital gain, and dividend tax rates) are a constant 20% for the whole 15 year investment horizon, will Ayse have a preference for one investment over the other? If so, which will she prefer and how much additional after-tax accumulation will she have with the preferred option in comparison with the less preferred option?

(20 points possible): If instead all tax rates are 20% in the initial year of the investment but are 30% in all years after, will Ayse have a preference for one investment over the other? If so, which will she prefer and how much additional after-tax accumulation will she have with the preferred option in comparison with the less preferred option?

(20 points possible): Now, alternatively, assume all tax rates are 30% in the initial tax year of the investment but are 20% in all years after, will Ayse have a preference for one investment over the other? If so, which will she prefer and how much additional after-tax accumulation will she have with the preferred option in comparison with the less preferred option?