SOLUTION: A bank offers two schenes of investment. Scheme A pay tax-free interest of 4%. Scheme B pays interest of 6% on which a tax of 20% has to be paid. A man has $5000 to invest.
Calcul
Question 1104663: A bank offers two schenes of investment. Scheme A pay tax-free interest of 4%. Scheme B pays interest of 6% on which a tax of 20% has to be paid. A man has $5000 to invest.
Calculate his earnings under the two differentschemes for 1 year Answer by Theo(13342) (Show Source):
5000 * 1.06 = 5300.
his profit is 300 but he has to pay 20% tax on it.
20% of 300 = 60.
he is left with 240.
even though he had to pay 20%, he is still better off with the 6% investment that he has to pay 20% tax on rather than the 4% investment that he doesn't have to pay tax on.
his after tax earning on the 6% is .06 * .8 = .048.
5000 * 1.048 = 5240.
his tax free interest is 240.
first investment at 4% gives him a tax free interest of 200.
second investment at 6% with 20% tax on the interest gives him a tax free interest of 240.
he can compare the investments directly by calculating the after tax interest rate.
after tax interest rate = before tax interest rate * (1 - tax rate on interest).
