Question

Lincoln Univ MAT110, sec CengageNO... Notifications Grades for Mketi eBook Calculator Problem 4-28 (LO. 1, 2, 5) Harper is considering three alternative investments of $10,000. Assume that the taxpayer is in the 24% marginal tax bracket for ordinary income and 15% for qualifying capital gains in all tax years. The selected investment will be liquidated at the end of five years. The alternatives are: • A taxable corporate bond yielding 5.333% before tax and the interest can be reinvested at 5.333% before tax. • A Series EE bond that will have a maturity value of $12,200 (a 4% before-tax rate of return). • Land that will increase in value. The gain on the land is classified and taxed as a long-term capital gain. The income from the bonds is taxed as ordinary income. How much must the land increase in value to yield a greater after-tax return than either of the bonds? Below are the factors for the compound amount of $1 and compound value of annuity payments at the end of five years: Interest Rate $1 Compounded $1 Annuity Compounded for Five Years for Five Years 4% 1.2167 5.4163 5% 1.2763 5.5256 When required, round your answer to the nearest dollar. a. The taxable bond and reinvested earnings will accumulate at an after-tax rate of 5% be taxed each year. The after-tax value of the taxable bond and reinvested earnings will be $ b. The income from the Series EE bond The after-tax value of the Series EE bond will be $ c. Because the gain on the land will be taxed as a long-term capital gain, the sales proceeds less of the appreciation must exceed $ to yield a greater after-tax d. Therefore, the land must increase in value by at least return than the investment in either of the bonds. Next > Check My Work Save and Exit Submit Assignment for Grading

Answer 1

The taxable bond and reinvested earnings will accumulate at an after-tax rate of (a)4.0% [(1 − .24) ×.05333] to equal $12,167 at the end of five years [($10,000 × 1.2167) = $12,167].(b)
The income from the Series EE bond will not be taxed until maturity in five years, and the after-tax value will be

$11,650(c ) [$12,200 − .25($12,200 − $10,000)].
Thus, the after-tax proceeds from the land must exceed $12,167.(c )
Because the gain on the land will be taxed as a long-term capital gain, the sales proceeds less 15%(d) of the appreciation must exceed $12,167.(d)
$10,000 + (1 − .15)(X − $10,000) = $12,167
$10,000 + .85X − $8,500 = $12,167
.85X = $10,667
X = $12,549
Thus, the land must increase in value by more than $12,549(e) to yield a greater after-tax return than the investment in either of the bonds.