Roy is considering purchasing land for $10,000. He expects the land to appreciate in value 8% each year (compounded), and he will sell it at the end of 10 years. He also is considering purchasing a bond for $10,000. The bond does not pay any annual interest but will pay $21,589 at maturity in 10 years. The before-tax rate of return on the bond is 8%. Roy is in the 40% (combined Federal and state) marginal tax bracket. He has other investments that earn an 8% before-tax rate of return. Given that the compound interest factor at 8% is 2.1589 and at 4.8% is 1.5981, which alternative should Roy choose?

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The Answer of Roy is considering purchasing land for $10,000. He expects the land to appreciate in value 8% each year (compounded), and he will sell it at the end of 10 years. He also is considering purchasing a bond for $10,000. The bond does not pay any annual interest but will pay $21,589 at maturity in 10 years. The before-tax rate of return on the bond is 8%. Roy is in the 40% (combined Federal and state) marginal tax bracket. He has other investments that earn an 8% before-tax rate of return. Given that the compound interest factor at 8% is 2.1589 and at 4.8% is 1.5981, which alternative should Roy choose?

Roy Is Considering Purchasing Land for $10,000