Overview

Main Menu Name: After-Tax

Calculates the interest expense on an investment, the taxable income, the tax due, the after-tax cash return, the rate of return on the total amount invested, and the rate of return on equity.

In this article:

• Background
• Why should I use this calculator?
• Getting Started
• Entering Data
• Results

Background

Representatives must have a great deal of information in order to compare one investment to another, or to judge the relative performance of an investment from one year to the next or over a period of time, or to make "buy" or "sell" decisions.

Here are four major criteria used when making these decisions:

• The net cash flow from the investment. This is extremely important for cash flow management purposes. If the client is not able to realize sufficient net cash from an investment, he or she may not be able to make interest payments on the investment or pay other related expenses. Even if an investment has a rate of return superior to an alternative, the level of net cash flow may be the deciding factor as to which investment should be selected.
• The after-tax return on the investment. In comparing investments, planners often overlook the fact that a client's wealth or income should only be measured in terms of "the bottom line." A comparison of investments should always take into account how much the client will have left after payment of income taxes.
• The rate of return on investment. Other things being equal, a client should select the investment that produces the highest rate of return. No investment should be made if the rate of return on the investment is below acceptable levels or negative.
• The rate of return on equity. This may be the best gauge of an investment since the overall rate of return may significantly understate the true value of an investment which provides a positive after-tax cash return and is leveraged. This percentage illustrates the power realized by an investor who wisely uses borrowed money to compound the return on his own.

Why should I use this calculator?

• To choose one investment over various alternatives.
• To decide whether or not to borrow money to purchase an investment.
• To calculate the amount of money needed to borrow to finance an investment.
• To compute the year-to-year trend of an investment.
• To decide when to sell an investment.

Getting Started

Planners must have a great deal of information in order to compare one investment to another, or to judge the relative performance of an investment from one year to the next or over a period of time, or to make "buy" or "sell" decisions.

Here are four major criteria used when making these decisions:

1. The net cash flow from the investment. This is extremely important for cash flow management purposes. If the client is not able to realize sufficient net cash from an investment, he or she may not be able to make interest payments on the investment or pay other related expenses. Even if an investment has a rate of return superior to an alternative, the level of net cash flow may be the deciding factor as to which investment should be selected.
2. The after-tax return on the investment. In comparing investments, planners often overlook the fact that a client's wealth or income should only be measured in terms of "the bottom line." A comparison of investments should always take into account how much the client will have left after payment of income taxes.
3. The rate of return on investment. Other things being equal, a client should select the investment that produces the highest rate of return. No investment should be made if the rate of return on the investment is below acceptable levels or negative.
4. The rate of return on equity. This may be the best gauge of an investment since the overall rate of return may significantly understate the true value of an investment which provides a positive after-tax cash return and is leveraged. This percentage illustrates the power realized by an investor who wisely uses borrowed money to compound the return on his own.

Entering Data

1. Amount of Investment:  Enter the amount invested by the client.
2. Income After Expenses:  Enter the income generated by the investment after actual or estimated expenses.
3. Loan Amount:  Enter the amount of money borrowed that will be used to finance the purchase of the investment.
4. Loan Interest Rate:  Enter the interest paid on the borrowed amount.
5. Client's Tax Rate:  Enter the client's combined federal and state marginal tax bracket.

Results

The program calculates the net income, the interest payable, the taxable income, the tax due, the after-tax cash flow from the investment, the overall rate of return, and the rate of return on equity.