Question #1

Keyshawn Vonte, who has a 30 percent marginal tax rate, invested $68,500 in a bond that pays 6.0 percent annual interest.

1. Compute Vontes annual net cash flow from this investment assuming that the interest is tax-exempt income.
2. Compute Vontes annual net cash flow from this investment assuming that the interest is taxable income.

Question #2

Company J must choose between two alternative business expenditures with the following cashflows:

Expenditure 1: $260,000 cash outflow

Expenditure 2: $184,600 cash outflow

Required:

1. Determine the marginal tax rate at which the after-tax cash flows from the two expenditures are equal assuming that Expenditure 1 is fully deductible and Expenditure 2 is nondeductible.
2. Determine the marginal tax rate at which the after-tax cash flows from the two expenditures are equal assuming that Expenditure 1 is 50 percent deductible and Expenditure 2 is nondeductible.
3. Determine the marginal tax rate at which the after-tax cash flows from the two expenditures are equal assuming that Expenditure 1 is fully deductible and Expenditure 2 is 50 percent deductible.