Problem:
Following is a problem. Can anyone explain the steps that were used and why? Is there an easier way to perform the calculations?
A Taxpayer is considering three alternative investments of $10,000. Assume the taxpayer is in the 28% 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 5 years. The alternatives are:
A taxable corporate bond yielding 5% before tax and the interest can be reinvested at 5% before tax
A Series E bond that will have a maturity value of $12,000 (a 4% before-tax rate of return
Land that will increase in value
The gain on the land will be classified and taxed as a long-term capital gain. The income from the bonds is taxed at ordinary income. How much must the land increase in value to yield a greater after-tax return than either of the bonds?
Given: Compound amount of $1 and compound value of annuity payments at the end of five years:
Interest rate $1 Compounded for 5 yrs $1 Annuity compounded for 5 yrs
5% $1.28 $5.53
4% $1.22 $5.42
3.6% $1.19 $5.37