Question
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
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?
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The Process Auditing And Techniques Guide
Authors: J.P. Russell
2nd Edition
087389782X, 978-0873897822
