mr. erske plans to pay $100,000 for one of three investment alternatives that have the same risk. the income from investment 1 would be taxed at mr. erske's 32% regular tax rate, the income from investment 2 would be taxed at a 15% preferential rate, and the income from investment 3 is tax-exempt. the investments offer the following before-tax yields. investment 1: 8.5% investment 2: 7.5% investment 3: 6.0% which investment should mr. erske select?

Question

27-10-2022
Business

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mr. erske plans to pay $100,000 for one of three investment alternatives that have the same risk. the income from investment 1 would be taxed at mr. erske's 32% regular tax rate, the income from investment 2 would be taxed at a 15% preferential rate, and the income from investment 3 is tax-exempt. the investments offer the following before-tax yields. investment 1: 8.5% investment 2: 7.5% investment 3: 6.0% which investment should mr. erske select?

Answer :

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Qwclear Qwclear · Answer 1 · 2022-10-31T13:20:41-04:00

Mr. Erske will choose Investment 2 as the after-tax yield on Investment 2 is the highest.

The after-tax yield may be defined as the return that an investor gets from an investment after the deduction of the taxes from the investment. According to the question, Investment 1 will be taxed at 32% rate and 8.5% investment is taxed. After-tax yield will be expressed as

After-tax yield = %Investment taxed (1 - %tax rate)

The after-tax yield will on Investment 1 will be

After-tax yield = 8.5%(1 - 0.32) = 5.78%

According to the question, Investment 2 will be taxed at 15% rate and 7.5% investment is taxed.

The after-tax yield will on Investment 2 will be

After-tax yield = 7.5%(1 - 0.15) = 6.375%

According to the question, Investment 3 will be tax exempted, and 6.0% investment is taxed.

The after-tax yield will on Investment 2 will be

After-tax yield = 6%

So, Investment 2 will be giving more after-tax yield.

Learn more about After-tax yield at:

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