oC M McGraw-Hill Connect (D)C mework At the beginning of the year, Mr. L put $50
ID: 2328838 • Letter: O
Question
oC M McGraw-Hill Connect (D)C mework At the beginning of the year, Mr. L put $50,000 cash into Investment X. At the end of the year, he received a check for $2,800, representing his annual return on the investment. Mr. L's marginal tax rate on ordinary income is 37 percent. However, his return on Investment X is a capital gain taxed at 20 percent. At the beginning of the year, Mr. L could have invested his $50,000 in Business Z with an 8 percent annual return. However, this return would have been ordinary income rather than capital gain. ering the fact that Mr. L could have invested in Business Z, how much implicit tax did he pay with respect to Investment X? b. Did Mr. L make the correct decision by putting his $50,000 into Investment X instead of Business Z? Complete this question by entering your answers in the tabs below. Required A Required B Considering the fact that Mr. L could have invested in Business Z, how much implicit tax did he pay with respect to Investment X? cit tax paid Required B >Explanation / Answer
Part a:
In case investment in X
Particulars
Amount ($)
Amount ($)
Investment in X
50,000.00
Return at the end of the year
2,800.00
Less: Capital gain tax (2800 x 20%)
560.00
Net return on the investment
2,240.00
In case investment in Z
Particulars
Amount ($)
Amount ($)
Investment in X
50,000.00
Return at the end of the year (50000 x 8%)
4,000.00
Less: Tax on return (4000 x 37%)
1,480.00
Net return on the investment
2,520.00
Thus, amount of implicit tax paid
Particulars
Amount ($)
Net return on investment Z
2,520.00
Less: Net return on investment in X
2,240.00
Implicit tax paid
280.00
Part b:
No, Mr L did not make the right choice by investing in X as the net return after payment of taxes was higher for investment in Z. The following calculation will be useful to understand it.
In case investment in X
Particulars
Amount ($)
Amount ($)
Investment in X
50,000.00
Return at the end of the year
2,800.00
Less: Capital gain tax (2800 x 20%)
560.00
Net return on the investment
2,240.00
In case investment in Z
Particulars
Amount ($)
Amount ($)
Investment in X
50,000.00
Return at the end of the year (50000 x 8%)
4,000.00
Less: Tax on return (4000 x 37%)
1,480.00
Net return on the investment
2,520.00
Thus, as net return after payment of taxes would have been higher in case investment was made in Z, i.e. $2,520 as net return compared to investment in X with net return of $2,240 it is clear that investment should have been made in Z.
In case investment in X
Particulars
Amount ($)
Amount ($)
Investment in X
50,000.00
Return at the end of the year
2,800.00
Less: Capital gain tax (2800 x 20%)
560.00
Net return on the investment
2,240.00
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