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Compute explicit tax and implicit tax that firm l will pay

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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:

Problem a. Compute the explicit tax and implicit tax that Firm L will pay with respect to Investment A and Investment B.

Problem b-1. What is the annual after-tax cash flow for Investment A?

Problem b-2. What is the annual after-tax cash flow for Investment B?

Problem b-3. Which investment results in the greater annual after-tax cash flow?

Reference no: EM132889417

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