Ms.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

Ms. Leik's annual income from the investment is $50,000 x 10% = $5,000. Her annual expense is $600. So her pre-tax cash flow is $5,000 - $600 = $4,400. 
Since her marginal tax rate is 20%, her after-tax cash flow will be $4,400 x (1-0.20) = $3,520. 
However, if the interest is taxable but the expense is not deductible, her taxable income will be $5,000 - $600 = $4,400. Her tax liability will be $4,400 x 0.20 = $880. 
So her after-tax cash flow will be $4,400 - $880 = $3,520. 
Therefore, option B is correct.

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