Compute the value of the preferential rate to Mr. L.

At the beginning of the year, Mr. L put $50,000 cash into Investment X. At the end of the year, he received a check for $2,800, representing his annual return on the investment. Mr. L’s marginal tax rate on ordinary income is 39.6 percent. However, his return on Investment X is a capital gain taxed at 20 percent. Compute the value of the preferential rate to Mr. L.

Solution:

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