1. Mikes salary after-tax is $180,000. He wants to invest $80,000 of this after-tax salary to increase his retirement savings. He is deciding whether to invest this money in either a SV V investment (insurance policy) or an SV VI investment (Pension). He wants to hold either investment over 10 years. The SV V investment has a pre-tax rate of return of 7% and the SV VI investment has a pre-tax rate of return of 10%. When helping him 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. The After-Tax Accumulation Formulas for SV V and VI are as follows: SV V = $I(1+R)ⁿ SV VI = [$I/(1-t_{ord,Year 1})](1+R)ⁿ(1- t_{ord,Year 10}) $I = After-tax amount of initial investment R = before-tax rate of return per time period n = # of time periods t_ord,_{Year 1} = the ordinary tax rate in year 1 of the initial investment

t_ord,_{Year 10} = the ordinary tax rate in year 10 of the initial investment

Part A. If all tax rates (ordinary, capital gains, and dividends tax rates) are 20% in the initial year of the investment but are 30% in all years after, what will the after-tax accumulation for the SV V investment be?

Write answer here rounded to nearest dollar: $_______________

Part B. If all tax rates are 20% in the initial year of the investment but are 30% in all years after, what will the after-tax accumulation for the SV VI investment be?

Write answer here rounded to nearest dollar: $_______________

Part C. Ignoring your answers to parts A. and B., assume that the after-tax accumulation for SV VI is $250,000 and for SV V is $175,000, which investment will Mike prefer?

1. Mike will prefer SV V.
2. Mike will prefer SV VI.
3. Mike will be indifferent between SV V and SV VI.