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(Solved) (Latest ver. Aug 2020) - Maximizing After-Tax Cash Flows From An Investment

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Gregly Company, which has a 33% marginal tax rate, plans to make an investment that should generate $300,000 annual cash flow/ordinary income.

Instead of making the investment directly, Gregly could form a new taxable entity (L'il Greg) to make the investment. L'il Greg's marginal tax rate on the investment income would be only 25%. However, L'il Greg would have to incur a $26,500 annual nondeductible expense associated with the investment that Gregly would not incur.

a. Should Gregly make the investment directly or make it through L'il Greg to maximize after-tax cash flow?

b. Would your answer change if L'il Greg could deduct its $26,500 additional expense?


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