Roy Is Considering Purchasing Land for $10,000

question 28

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 an 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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Definitions:

Interlocking Directorates

The practice of having the same individuals serve on the boards of directors of multiple companies, potentially reducing competition.

Clayton Act

A United States antitrust law enacted in 1914, aimed at preventing anticompetitive practices in their incipiency.

Federal Trade Commission Act

The federal law of 1914 that established the Federal Trade Commission.

Alcoa Case

A 1945 case in which the courts ruled that the possession of monopoly power, no matter how reasonably that power had been used, was a violation of the antitrust laws; temporarily overturned the rule of reason applied in the U.S. Steel case.