Mr. Erske plans to pay $100,000 for one of three investment alternatives that have the same risk. The income from investment 1 would be taxed at Mr. Erske's 32% regular tax rate, the income from investment 2 would be taxed at a 15% preferential rate, and the income from investment 3 is tax-exempt. The investments offer the following before-tax yields.Investment 1: 8.5%Investment 2: 7.5%Investment 3: 6.0%Which investment should Mr. Erske select?

Question

Quizplus · Accepted Answer

To determine the best investment, calculate the after-tax yield for each investment. For Investment 1, the after-tax yield is 8.5% * (1 - 0.32) = 5.78%. For Investment 2, it's 7.5% * (1 - 0.15) = 6.375%. Investment 3 is tax-exempt, so its yield remains 6.0%. Therefore, Investment 2 offers the highest after-tax yield.

Mr Erske Plans to Pay $100,000 for One of Three