Mr. Massey, who is in the 32 percent marginal tax bracket and itemizes deductions, recently inherited...

Mr. Massey, who is in the 32 percent marginal tax bracket and itemizes deductions, recently inherited $30,000. He is considering three alternative uses for this windfall: He could buy shares in a mutual bond fund paying 6 percent interest a year. He could pay off a $30,000 personal debt to a local bank on which he pays $2,350 interest each year. He could pay off $30,000 of the mortgage incurred to buy his home. This principal repayment would decrease his annual home mortgage interest expense by $2,900. Compute the annual increase in Mr. Massey's after-tax cash flow for each of these three alternatives. Which alternative would you recommend and why? Can you show the break down of all 3 parts?

Expert Solution

	Mutual Fund	Personal debt	Mortgage
Interest received or saved	1,800	2,350	2,900
Tax expense/ (tax benefit)	(576)	-	(928)
After tax cash flow	1,224	2,350	1,972

Paying off personal debt saves most after tax interest.

He should use inheritance to pay off personal debt and save 2,350 interst.

Please rate.

ekkarill92 answered 2 days ago

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Mr. Massey, who is in the 32 percent marginal tax bracket and itemizes deductions, recently inherited...

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