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...

If Mr Massey buys the mutual fund shares his annual ...

Mr. Massey, who is in the 32 percent marginal tax bracket and itemizes deductions, recently inherited $30,000.

Question:

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?

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