How is after-tax cash flow from investments calculated?

Prepare for the QFA Investments Exam 1. Study with flashcards and multiple-choice questions with detailed explanations. Enhance your understanding and succeed on your exam!

The key idea is that after-tax cash flow reflects the actual cash you keep after paying all taxes on investment income. This means subtracting taxes on dividends, interest, and capital gains, and doing so with an awareness of your tax bracket and whether the investment is held in a tax-advantaged or tax-exempt account. Dividends and interest are taxed as ordinary income (or at preferential rates in some cases), while capital gains tax depends on how long you’ve held the asset (short-term at ordinary rates, long-term at lower rates). Depreciation is a non-cash deduction that reduces taxable income but isn’t a cash outlay you pay in cash flow, so subtracting it from pretax cash flow does not reflect actual after-tax cash. The correct approach captures all relevant taxes on investment income and how account type can alter those taxes, which is why subtracting taxes on dividends, interest, and capital gains—considering tax brackets and tax-efficient accounts—is the best description.