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.

1. Compute the annual increase in Mr. Masseys after-tax cash flow for each of these three alternatives.
2. Which alternative would you recommend?

Required A Required B Compute the annual increase in Mr. Massey's after-tax cash flow for each of these three alternatives. Mutual fund shares Personal debt Home mortgage