Harper is considering three alternative investments of $10,000. Assume that the taxpayer is in the 25% marginal

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Harper is considering three alternative investments of $10,000. Assume that the taxpayer is in the 25% 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?

Use the future value tables in Appendix G as needed for your calculations and comparisons.

Future Value
Future value (FV) is the value of a current asset at a future date based on an assumed rate of growth. The future value (FV) is important to investors and financial planners as they use it to estimate how much an investment made today will be worth...
Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
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South-Western Federal Taxation 2018 Comprehensive

ISBN: 9781337386005

41st Edition

Authors: David M. Maloney, William H. Hoffman, Jr., William A. Raabe, James C. Young

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