Reference no: EM132658622

Problem - Emily has $100,000 that she wants to invest and is considering the following two options:

Option A: Investment in Redbird Mutual Fund, which is expected to produce interest income of $8,000 per year.

Option B: Investment in Cardinal Limited Partnership (buys, sells, and operates wine vineyards). Emily's share of the partnership's ordinary income and loss over the next three years would be as follows:

Year - Income (Loss)

1 - ($ 8,000)

2 - (2,000)

3 - 34,000

Emily is interested in the after-tax effects of these alternatives over a three-year horizon. Assume that Emily's investment portfolio produces ample passive activity income to offset any passive activity losses that may be generated. Her cost of capital is 8%, and she is in the 32% tax bracket. The two investment alternatives possess equal growth potential and comparable financial risk.

Required -

a. Based on these facts, compute the present value of these two investment alternatives and determine which option Emily should choose. Refer to Appendix G for the present value factors.

b. Prepare your solution using spreadsheet software such as Microsoft Excel.