Reference no: EM131125049

Mr. and Mrs. Prinze are evaluating an investment in undeveloped land. The year 0 cost is $100,000, and they can borrow $60,000 of the purchase price at 8 percent. They will pay interest only in years 1 through 5. The annual property tax on the land will be $1,200 in years 1 through 5. Mr. and Mrs. Prinze project that they can sell the land in year 5 for $160,000 and repay the $60,000 loan from the sales proceeds. They have a 35 percent marginal tax rate and use a 9 percent discount rate to compute NPV.

Determine if they should make this investment under the following assumptions. They have enough net investment income and other itemized deductions so that the $6,000 annual carrying charge (interest plus property tax) is deductible in years 1 through 5. Because they do not itemize deductions, they elect to capitalize the annual carrying charge to the basis of the land. 4. Mr. and Mrs. U's taxable income is $260,000. Mr. U plans to exercise incentive stock options with a $65,000 bargain element. In addition to this bargain element, the couple has approximately $10,000 positive AMT adjustments and preferences. They want to invest $50,000 excess funds and could purchase either a corporate bond paying 10 percent or a newly issued private activity tax-exempt bond paying 7.5 percent. Both bonds have identical risk. Which investment yields the greater after-tax cash flow?