Which of the following employee benefits has the greater value? (assume a 28 percent tax rate.) a. a nontaxable pension contribution of $4,300 or the use of a company car with a taxable value of $6,325. b. a life insurance policy with a taxable value of $450 or a nontaxable increase in health insurance coverage valued at $340.

The correct answers are A. the use of a company car with a taxable value of $6,325. And B. a nontaxable increase in health insurance coverage valued at $340.

Explanation:

For non taxable benefits there's no need to calculate anything as we already know their values.

Therefore we only want to calculate the values of the company car and of the life insurance policy, both after tax.

To do that we calculate the value of the tax for each benefit and then we substract the result to the value of the corresponding benefit to get the value of the benefit after tax.

For the company car it would be:

Car's tax = Car's value before tax × 28% tax = $6,325 × 0.28 = $1,771

Company's car value after tax = Car's value before tax - Car's tax = $6,325 - $1,771 = $4,554

As for the life insurance policy the calculations would be:

Insurance policy's tax = Policy's value before tax × 28% tax = $450  × 0.28 = $126

Insurance policy's value after tax = Policy's value before tax - Insurance policy's tax = $450 - $126 = $324

An alternative way to do these calculations would be:

Company's car value after tax = $6,325 × (1 - 0.28) = $4,554

Insurance policy's value after tax = $450  × (1 - 0.28) = $324

Since $4,554 > $4,300 we conclude that the use of a company car is more valuable; and since $324 < $340 we conclude that a nontaxable increase in health insurance coverage is more valuable.

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