Mr. Z, who is in the 33 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. Z’s after-tax cash flow for each of these three alternatives. Which alternative would you recommend and why?