Assuming a 1-year, money market account investment at 4.38 percent (APY), a 2.91

Question

Assuming a 1-year, money market account investment at 4.38 percent (APY), a 2.91% inflation rate, a 28 percent marginal tax bracket, and a constant $50, 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 4.38 percent (APY), a 2.91% inflation rate, a 28 percent marginal tax bracket, and a constant $50, 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?

Question - 2 This is the other part to the question: Assuming a 1-year, money market account investment at 4.38 percent (APY), a 28 percent marginal tax bracket, and a constant $50, 000 balance the after-tax monetary return is ?%

Explanation / Answer

The after-tax return on the investment is return after paying federal income taxes.

It can be calculated as below:

After-tax return = taxable return x (1- marginal rate)

Marginal tax rate is given as 28%

After tax return is 7%

So, 7% = taxable return x (1- 28%)

So taxable return = 9.72%

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.

Given inflation rate for the year is 2.91%.

The real rate of return formula is the sum of one plus the nominal rate divided by the sum of one plus the inflation rate which then is subtracted by one. In essence, it is obtained after adjusting inflation.

Real rate = (1+ 0.0972)/(1+0.0291) – 1

Real rate = 1.0662 – 1

Real rate return = 6.62% (In terms of percentage)

Since the real return is positive we should be considering investing in this money market account. This will lead to increase in cash flow. The monetary return is calculated below.

Next, Annual Percentage Yield (APY) refers to how much money you earn on a deposit over one year.

Given, APY is 4.38% and Invested amount which stays constant throughout the year is $50,000

So return in monetary terms is equal to $50,000 x 4.38% = $2,190.

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