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?
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?
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