Emily has $100,000 that she wants to invest and is considering the following two options: Option

Question:

Emily has $100,000 that she wants to invest and is considering the following two options:

• Option A: Investment in Redbird Mutual Fund, which is expected to produce interest income of $8,000 per year.

• Option B: Investment in Cardinal Limited Partnership (buys, sells, and operates wine vineyards). Emily’s share of the partnership’s ordinary income and loss over the next three years would be as follows:

Year Income (Loss)

1 .......... ($ 8,000)

2 .......... (2,000)

3 .......... 34,000

Emily is interested in the after-tax effects of these alternatives over a three-year horizon. Assume that Emily’s investment portfolio produces ample passive income to offset any passive losses that may be generated. Her cost of capital is 8% (the present value factors are .92593, .85734, and .79383), and she is in the 28% tax bracket. The two investment alternatives possess equal growth potential and comparable financial risk. Based on these facts, compute the present value of these two investment alternatives and determine which option Emily should choose.

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Partnership
A legal form of business operation between two or more individuals who share management and profits. A Written agreement between two or more individuals who join as partners to form and carry on a for-profit business. Among other things, it states... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...