PRINCIPLES OF TAXATION F/BUS.+INVEST.
PRINCIPLES OF TAXATION F/BUS.+INVEST.
22nd Edition
ISBN: 9781259917097
Author: Jones
Publisher: MCG
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Chapter 4, Problem 24AP

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.

  1. a. Compute the explicit tax and implicit tax that Firm L will pay with respect to Investment A and Investment B.
  2. b. Which investment results in the greater annual after-tax cash flow?
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PRINCIPLES OF TAXATION F/BUS.+INVEST.

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