1. Project Q offers a pre-tax return
of 7% while project Z has a pre-tax rate of return of 11%. At the
same time, income streams from Project Q are tax exempt while
income from Project Z is taxable at an ordinary tax rate of 24%.
(Assume the tax year is 2020).
a. What is the after-tax rate of return for Project Q? What is the
after-tax rate of return for Z?
b. Ignoring your answer to part a., assume the after-tax rate of
return for Project Q is 5% and
Project Z is 3%. Which investment should the
taxpayer choose: Q or Z?
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