Zhong is considering three alternative investments of $10,000. Zhong 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 sold at the end of five years. The alternatives are:
• A taxable corporate bond yielding 5.333% before tax and the interest reinvested at 5.333% before tax.
• A tax-favored bond that will have a maturity value of $12,200 (a 4% pretax 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 interest from the bonds is taxed as ordinary income: the interest from the corporate bond as it is earned annually, but that from the tax-favored bond is recognized only upon redemption.
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 F as needed for your calculations and comparisons.