Skip to main content

An Investigation of the Rule-of-Thumb Method of Estimating After-Tax Rates of Return

Buy Article:

$21.50 plus tax (Refund Policy)

The effect of income taxes may significantly alter an investment's expected profitability relative to competing alternatives. With one exception, both post-tax cash flows and a post-tax discount rate must be used if the effects of taxation are to be correctly incorporated into an investment analysis. The adjustment of the pre-tax discount rate to a post-tax rate often is accomplished by using an estimate derived by rule-of-thumb. This estimate (effectively reducing the pre-tax rate by the product of itself and 1 minus the marginal income tax rate) is accurate only when the alternative used to determine the opportunity cost of capital involves a nondepreciating asset, returning equal annual payments, whose salvage value is exactly 100% of first cost, or where the alternative investment's life is equal to 1 year. For alternatives with depreciable, depletable, or tax-deferred assets, the rule-of-thumb estimate is not accurate. Its accuracy depends on the alternative's real rate of return, the investor's marginal income tax rate, the level of inflation, and the investment period. In general, the rule-of-thumb method's accuracy decreases as the real rate of return decreases and as the income tax rate, inflation, and investment period increase. In addition, its accuracy is further decreased as depreciation or depletion is accelerated, or if an investment tax credit is included as part of the expected income stream. For. Sci. 36(4):878-893.
No Reference information available - sign in for access.
No Citation information available - sign in for access.
No Supplementary Data.
No Article Media
No Metrics

Keywords: Income taxation; depletion; depreciation; discount rate; forest taxation

Document Type: Journal Article

Affiliations: Associate Professor, Department of Forestry, Iowa State University, 251 Bessey Hall, Ames, IA 50011

Publication date: 1990-12-01

More about this publication?
  • Important Notice: SAF's journals are now published through partnership with the Oxford University Press. Access to archived material will be available here on the Ingenta website until March 31, 2018. For new material, please access the journals via OUP's website. Note that access via Ingenta will be permanently discontinued after March 31, 2018. Members requiring support to access SAF's journals via OUP's site should contact SAF's membership department for assistance.

    Forest Science is a peer-reviewed journal publishing fundamental and applied research that explores all aspects of natural and social sciences as they apply to the function and management of the forested ecosystems of the world. Topics include silviculture, forest management, biometrics, economics, entomology & pathology, fire & fuels management, forest ecology, genetics & tree improvement, geospatial technologies, harvesting & utilization, landscape ecology, operations research, forest policy, physiology, recreation, social sciences, soils & hydrology, and wildlife management.
    Forest Science is published bimonthly in February, April, June, August, October, and December.

    2016 Impact Factor: 1.782 (Rank 17/64 in forestry)

    Average time from submission to first decision: 62.5 days*
    June 1, 2016 to Feb. 28, 2017

    Also published by SAF:
    Journal of Forestry
    Other SAF Publications
  • Submit a Paper
  • Membership Information
  • Author Guidelines
  • Podcasts
  • Ingenta Connect is not responsible for the content or availability of external websites
  • Access Key
  • Free content
  • Partial Free content
  • New content
  • Open access content
  • Partial Open access content
  • Subscribed content
  • Partial Subscribed content
  • Free trial content
Cookie Policy
Cookie Policy
Ingenta Connect website makes use of cookies so as to keep track of data that you have filled in. I am Happy with this Find out more