John has a chocie to make between two investment opportunities. investment 1, would bear a interest of 12.5% over a period of 5 years but is taxable. investment 2 would bear an interest of 8% over the same period but is tax exempt. If john 's taxable rate is 12% which option is the better choice? why
To determine which investment option is the better choice for John, we need to calculate the net return after taxes for each option. Here's how you can calculate it:
1. For Investment 1:
- Calculate the taxable return: 12.5% interest over 5 years = 62.5% return.
- Calculate the tax amount: 62.5% return * 12% tax rate = 7.5% tax.
- Calculate the net return: 62.5% return - 7.5% tax = 55% net return.
2. For Investment 2:
- Calculate the tax-exempt return: 8% interest over 5 years = 40% return.
- Since Investment 2 is tax exempt, there is no further calculation needed. The tax-exempt return is the net return.
Now, we compare the net return for each investment:
- Investment 1 (taxable return) has a net return of 55%.
- Investment 2 (tax-exempt return) has a net return of 40%.
Since Investment 1 has a higher net return (55%) compared to Investment 2 (40%), investment 1 is the better choice for John.
Note: It's important to consider other factors as well, such as the risk associated with each investment and individual financial goals. This answer is based solely on the comparison of net returns after taxes.