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Compute the explicit tax and implicit tax

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Question - Firm L has $670,000 to invest and is considering two alternatives. Investment A would pay 6 percent ($40,200 annual before-tax cash flow). Investment B would pay 4.8 percent ($32,160 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?

Reference no: EM132977727

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