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That is why, when it comes to comparing different investments, it is important to use after - tax returns to make a decision. In this
That is why, when it comes to comparing different investments, it is important to use aftertax returns to make a decision. In this scenario, we're evaluating two investments: a fully taxable procedure, on the one side, and a taxexempt possibility on the other side.
The investment is fully taxable initialing with an return and the tax rate on this investment is equally If we adjust for taxes then the rate stands at percent. That is why this calculation represents the extra burden of taxation brought to the investments profitability.
On the other hand, the taxexempt investment makes a return on the invested money and is also taxexempt by reason of its name. Thus, even after subtracting taxes which were assumed to be for the purposes of comparison its after tax return stands at Therefore comparison of these after tax yields shows that the taxexempt investment yields a superior return to the taxable investment.
The first investment is taxexempt and it gives return on investment while the second investment which is taxable investment gives only of return if investment after the taxes are subtracted based on the tax rate of It can be concluded from the calculation that the tax exempt investment is the best for an investor who fall under tax bracket. It also has a higher effective return meaning increased profitability in most cases. However, this conclusion should be understood under one assumption that the company tax rate is fixed and the risks of these investments are similar. Therefore its important for investors to assess and factor other qualitative characteristics such as liquidity, investment horizon, and the balance of the investment portfolio when making investment decisions.
All things considered, the aftertax return offered by the taxexempt investment means that it is the better option in this case, stressing the significance of tax consequences in the decisionmaking process of choosing an investment.
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