A taxpayer can invest $ 1,000 in a money market fund that yields an annual pretax rate of return of 8%, or buy an acre of land for $ 1,000 that appreciates at a 7% annual rate. The taxpayer plans to sell the land after 20 years and faces a 25% tax rate each year.
a. What is the after tax accumulation at the end of 20 years from each investment?
b. What is the annualized after tax rate of return from each investment? (Exercise adapted from problem written by Richard Sansing, Dartmouth College.)