After Tax Analysis of Investment Returns
Using cash flows as a basis for decision making. Two basic decision-making tools: traditional valuation methods and rules of thumb and ratios. Since traditional valuation methods and most ratios do not explicitly use after-tax figures in their analysis, here we cover only one commonly used rule of thumb along with new techniques called discounted cash flow models.
Rule of Thumb: The After-Tax Rate (ATR)
Operationally,
ATR = ATCF equity investment
For instance, the expected ATCF for our apartment building example was $1,860 for the first year, and the equity investment is the $140,000 price plus the acquisition costs ($1,500) and the financing costs ($2,240) less the $112,000 mortgage, or $31,740; the ATR then would be 5.86 percent. As a basis for decision making, the ATR is subject to the same limitations as the EDR.
