Leik has $50,000 in an investment paying 10% annual interest. Each year, she incurs a $600 cash expense relating to the investment. If Ms. Leik's marginal tax rate is 20%, which of the following statements is true?

Question

Quizplus · Accepted Answer

If the $5,000 annual interest is taxable and the expense is not deductible, Ms. Leik's annual tax cost is $1,000 ($5,000 × 20%), and her after-tax cash flow is $3,400 ($5,000 interest - $600 expense - $1,000 tax cost).

Leik Has $50,000 in an Investment Paying 10% Annual Interest