Firm L has $500,000 to invest and is considering two alternatives. Investment A would pay 6 percent ($30,000 annual before-tax cash flow). Investment B would pay 4.8 percent ($24,000 annual before-tax cash flow). The return on Investment A is taxable, while the return on Investment B is tax exempt. Firm L forecasts that its 21 percent marginal tax rate will be stable for the foreseeable future.

Required:

a. Compute the explicit tax and implicit tax that Firm L will pay with respect to Investment A and Investment B.

b-1. What is the annual after-tax cash flow for Investment A?

b-2. What is the annual after-tax cash flow for Investment B?

b-3. Which investment results in the greater annual after-tax cash flow?

Required:

A.

	Investment A	Investment B
Explicit tax paid
Implicit Tax Paid

b.1 & b.2

		Amount
b-1	Annual after-tax cash flow
b-2	Annual after-tax cash flow

b.3

Which Investment results in the greater annual after-tax cash flow?