Question

1. Project Q offers a pre-tax return of 7% while project Z has a pre-tax rate...

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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