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1A

Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $41,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $41,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 37 percent this year and next year, and that she can earn an after-tax rate of return of 6 percent on her investments.

Required:

1. What is the after-tax cost if Isabel pays the $41,000 bill in December?
2. What is the after-tax cost if Isabel pays the $41,000 bill in January? UseExhibit 3.1.

   Note: Round your answer to the nearest whole dollar amount.

3. Based on requirements a and b, should Isabel pay the $41,000 bill in December or January

1B

Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $60,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $60,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 37 percent this year and next year, and that she can earn an after-tax rate of return of 7 percent on her investments.

Required:

1. What is the after-tax cost if Isabel pays the $60,000 bill in December?
2. What is the after-tax cost if Isabel pays the $60,000 bill in January? UseExhibit 3.1.

   Note: Round your answer to the nearest whole dollar amount.

3. Based on requirements a and b, should Isabel pay the $60,000 bill in December or January

1C

Bobs Lottery Incorporated has decided to offer winners a choice of $160,000 in 10 years or some amount currently. Assume that Bobs Lottery Incorporated earns a 8 percent after-tax rate of return. What amount should Bob's offer lottery winners currently in order to be indifferent between the two choices? UseExhibit 3.1.

Note: Round your answer to the nearest whole dollar amount.

1D

Hui is currently considering investing in municipal bonds that earn 8.55 percent interest, or in taxable bonds issued by the Coca-Cola Company that pay 11.40 percent.

Required:

1. If Hui's tax rate is 22 percent, which bond should he choose?
2. Which bond should he choose if his tax rate is 32 percent?
3. At what tax rate would he be indifferent between the bonds?
4. What strategy is this decision based upon?

EXHIBIT 3-1 Present Value of a Single Payment at Various Annual Rates of

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