Roy Is Considering Purchasing Land for $10,000

question 34

Essay

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.Roy has other investments that earn a 8% before-tax rate of return.Given that the compound interest factor at 8% is 2.1589, and at 4.8% the factor is 1.5981, which alternative should Roy choose?

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