Gregly Company, Which Has a 33% Marginal Tax Rate, Plans

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. Gregly's annual after-tax cash flow if it made the investment directly would be $201,000 ($300,000 taxable income - $99,000 tax cost). L'il Greg's annual after-tax cash flow would be $198,500 ($300,000 taxable income - $75,000 tax cost - $26,500 nondeductible expense.) Therefore, Gregly should make the investment directly.A. Should Gregly make the investment directly or make it through L'il Greg to maximize after-tax cash flow?B. L'il Greg's annual after-tax cash flow would be $205,125 ($300,000 - $26,500 deductible expense - $68,375 tax cost [$273,500 taxable income * 25%]). Therefore, Gregly should make the investment through L'il Greg.B.. Would your answer change if L'il Greg could deduct its $26,500 additional expense?