Question - Firm L has $715,000 to invest and is considering two alternatives. Investment A would pay 6 percent ($42,900 annual before-tax cash flow). Investment B would pay 4.5 percent ($32,175 annual before-tax cash flow). The return on Investment A is taxable, whereas the return on Investment B is tax exempt. Firm L forecasts that its 35 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-1. What is the annual after-tax cash flow for Investment A?
3. b-2. What is the annual after-tax cash flow for Investment B?
4. b-3. Which investment results in the greater annual after-tax cash flow?