Question

Understal Company has $750,000 to invest and two competing investment opportunities. Investment 1 would pay 9% per year ($67,500 annual before-tax cash flow). Investment 2 would pay 7% per year ($52,500 annual before-tax cash flow). The return on Investment 1 is taxable at Understal's 35% rate on ordinary income, while the return on Investment 2 is taxable at a 20% preferential rate.

a) Compute the explicit and implicit tax that Understal would pay with respect to each investment.

b) Which investment results in the greater after-tax cash flow?

Answer 1

The answer and procedures of the exercise are attached in the following archives.

Explanation

You will find the procedures, formulas or necessary explanations in the archive attached below. If you have any question ask and I will aclare your doubts kindly.