Question
You are the manager of a Fortune 500 hotel chain and must decide where to locate a new hotel. Based on tax considerations, your accounting
You are the manager of a Fortune 500 hotel chain and must decide where to locate a new hotel. Based on tax considerations, your accounting department suggests that Atlantic City is the best choice, followed closely by Las Vegas. In particular, your current year tax savings from locating in Atlantic City are $4 million, but they are only $3 million in Las Vegas. Your marketing department, on the other hand, has provided you with sales estimates that suggest that the present value of the gross (of taxes) operating profits from locating in Atlantic City are only $10 million, but they are $14 million for Las Vegas. It will cost $14 million to build the hotel in either location. Ignoring all other considerations, where should you build the hotel? What are your firm's economic profits if you locate the hotel in Atlantic City?
The Taxpayer Relief Act of 1997 created the Roth IRA, which permits qualifying individuals to make after-tax retirement contributions of up to $2,000 annually. Contributions to a Roth IRA are not tax-deductible, but no taxes are paid on earnings generated from a Roth IRA. In contrast, contributions made to traditional IRAs are tax-deductible, but individuals will pay taxes on all future distributions. In short, investors using the Roth IRA make contributions that have already been taxed and have earnings that grow tax-free, while those using the traditional IRAs defer taxes until funds are withdrawn. Consider an individual who is five years away from retirement and will need to withdraw all her retirement funds at that time. She has $2,000 in pretax income to allocate each year to a retirement plan, faces a fixed tax rate of 15 percent now as well as at retirement, and anticipates a stable 8 percent return on her investments. She can set up a Roth IRA for a one-time, up-front fee of $10, or she can set up a traditional IRA for free. Which option should she choose?
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