Question

Assuming a 1-year, money market account investment at 2.09 percent (APY), a 0.86% inflation rate, a 25 percent marginal tax bracket, and a constant $40,000 balance, calculate the after-tax rate of return, the real return and the total monetary return. What are the implications of this result for cash management decisions? Assuming a 1-year, money market account investment at 2.09 percent (APY), a 25 percent marginal tax bracket, and a constant $40,000 balance the after-tax rate of return is 1.57 %. (Round to two decimal places.) Assuming a 1-year, money market account investment at 2.09 percent (APY), a 25 percent marginal tax bracket, and a constant $40,000 balance the after-tax monetary return is $ 628. (Round to the nearest dollar.) Given an after-tax return of 1.57% and an inflation rate of 0.86% the after-tax real return is .71 %. (Round to two decimal places.) Given an after-tax return of 1.57% and an inflation rate of 0.86% the after-tax real monetary return is $ . (Round to the nearest dollar.)

Answer 1

Given,

constant balance of $40,000

time period is 1 year

money market account investment return = 2.09%

Marginal tax rate = 25%

inflation rate = 0.86%

1. Computation of after tax rate of return and after tax money return

APY on investment = 2.09%

Tax rate = 25%

After tax rate of return = 2.09%(1-0.25) = 1.5675% equivalent to 1.57%

After tax money return = $40,000 x 1.57% = $628

2. Computation of after tax real return and after tax real money return

after tax rate of return = 1.57%

inflation rate = 0.86%

after tax real rate of return = 1.57% - 0.86% = 0.71%

after tax real money rate of return = $40,000 x 0.71% = $284