Mr. Carson plans to pay $125,000 for one of three investment alternatives that have the same risk. The income from investment 1 would be taxed at Mr. Carson's 35% regular tax rate, the income from investment 2 would be taxed at a 22% preferential rate and the income from investment 3 is tax-exempt. The investments offer the following annual before-tax yields.

Investment #1 9.0%

Investment #2 6.5%

Investment #3 5.5% Which investment should Mr. Carson select?

		Investment 1
		Investment 2
		Investment 3
		Mr. Carson is neutral between investment 1 and investment 3