TRUE RATE OF RETURN ON
A COMPLETED INVESTMENT
Refer to the previous calculation procedure. What was the actual after-tax rate of return
yielded by this investment, computed at the conclusion of the venture?
Calculation Procedure:
- Determine the after-tax income
In this situation, only the actual disbursements and receipts, as well as their timing, are
pertinent. The depreciation charges, which arise from bookkeeping entries, are irrelevant.
To determine the after-tax income, deduct the tax payment from the net revenue listed
in Table 11 to obtain the after-tax income. List this income in Table 12.
- Determine the present worth of the annual receipts
Compute the present worth of each year's after-tax income for years 1 through 6, and take
the sum. To perform this computation, assume an interest rate that is believed to approxi-
mate the actual rate of return on the $24,000 investment.
At 12 percent, present worth of the after-tax income = $24,444. At 15 percent, present
worth of the after-tax income = $22,874. By linear interpolation for a present worth of
$24,000, i = rate of return = 12.8 percent.
AVERAGE RATE OF RETURN
ON COMPOSITE INVESTMENT
Suppose that the income in the previous calculation procedure were reinvested at 8 per-
cent after taxes, until the end of the fourth year. Thereafter, the income received was rein-
vested at 10 percent. What was the average rate of return on the $24,000 capital during
the 6-year period?
Calculation Procedure:
- Compute the value of the original capital at the end
of the sixth year
Thus, by using the SPCA factor for the after-tax income listed for each year in Table 12
TABLE 12. Determination of True Rate of Return
Year Net revenue, $ Tax payment, $ After-tax income, $
1 10,00 0 2,00 0 8,00 0
2 9,60 0 1,80 0 7,80 0
3 8,00 0 1,00 0 7,00 0
4 6,40 0 20 0 6,20 0
5 4,400 2,200 2,200
6 3,200 1,400 1,800
