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Homework answers / question archive / Would you prefer a fully taxable investment earning 8

Would you prefer a fully taxable investment earning 8

Finance

Would you prefer a fully taxable investment earning 8.1 percent or a tax-exempt investment earning 6.1 percent? (Assume a 28 percent tax rate) Why?

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Computation of the return on fully taxable investment:-

Return on fully taxable investment = Taxable earnings * (1 - Tax rate)

= 8.1% * (1 - 28%)

= 5.83%

Return on fully taxable investment = 5.83%

Return on fully taxable investment earning is less than the tax exempt investment earning (6.1%). So, we should not prefer fully taxable investment earning. 

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