Question
When comparing two investment options, one with an expected return of 10% per year and another with an expected return of 6% per year, which option would be more profitable considering the capital gains tax rate is 20%?
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Answer to a math question When comparing two investment options, one with an expected return of 10% per year and another with an expected return of 6% per year, which option would be more profitable considering the capital gains tax rate is 20%?
Timmothy
4.899 Answers
1. Calculate the after-tax return for the investment with a 10% expected return:
R_{10\%} = 10\% \times (1 - 0.20) = 10\% \times 0.80 = 8\%
2. Calculate the after-tax return for the investment with a 6% expected return:
R_{6\%} = 6\% \times (1 - 0.20) = 6\% \times 0.80 = 4.8\%
3. Compare the after-tax returns:
8\% > 4.8\%
Thus, the investment option with a 10% expected return is more profitable after considering the capital gains tax rate of 20%.
2. Calculate the after-tax return for the investment with a 6% expected return:
3. Compare the after-tax returns:
Thus, the investment option with a 10% expected return is more profitable after considering the capital gains tax rate of 20%.
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