Actuarial Rate of Return (Net Yield)
The actuarial rate of return is similar to the Dual
Rate of Return method of analysis except that the margin is assumed not to
be tax deductible.
Consider again the example used in the Dual Rate of Return method of
analysis.
For the dual rate of return with a pre-tax margin of 1.236% over a funding
cost of 15.000%, we have:
| Example 1 |
| Year |
After-tax Cashflow Lease |
Tax Saved on Funding |
Tax Saved on Margin |
Total After-tax Cashflow |
Cost of Funds |
Margin |
Principal Repaid |
Closing Investment Balance |
| 2008 |
(10,200) |
0 |
0 |
(10,200) |
0 |
0 |
(10,200) |
10,200 |
| 2009 |
5,080 |
0 |
0 |
5,080 |
1,530 |
126 |
3,424 |
6,776 |
| 2010 |
6,960 |
612 |
50 |
7,622 |
1,016 |
84 |
6,522 |
254 |
| 2011 |
(160) |
406 |
34 |
280 |
38 |
3 |
239 |
15 |
| 2012 |
|
15 |
1 |
16 |
2 |
0 |
14 |
1 |
| 2013 |
|
1 |
0 |
1 |
0 |
0 |
1 |
0 |
| 2014 |
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
| Total |
1,680 |
1,034 |
85 |
2,800 |
2,587 |
213 |
0 |
|
Using a non-deductible or after-tax margin of 0.788% gives:
| Example 2 |
| Year |
After-tax Cashflow Lease |
Tax Saved on Funding |
Tax Saved on Margin |
Total After-tax Cashflow |
Cost of Funds |
Margin |
Principal Repaid |
Closing Investment Balance |
| 2008 |
(10,200) |
0 |
– |
(10,200) |
0 |
0 |
(10,200) |
10,200 |
| 2009 |
5,080 |
0 |
– |
5,080 |
1,530 |
80 |
3,400 |
6,730 |
| 2010 |
6,960 |
612 |
– |
7,572 |
1,010 |
53 |
6,509 |
221 |
| 2011 |
(160) |
404 |
– |
244 |
33 |
2 |
209 |
12 |
| 2012 |
|
13 |
– |
13 |
2 |
0 |
11 |
1 |
| 2013 |
|
1 |
– |
1 |
0 |
0 |
1 |
0 |
| 2014 |
|
0 |
– |
0 |
0 |
0 |
0 |
0 |
| Total |
1,680 |
1,030 |
– |
2,710 |
2,575 |
135 |
0 |
|
Thus an after-tax margin of 0.788% p.a. is roughly equivalent to a pre-tax
margin of 1.236% which is reasonable at the 30% tax rate assumed.
The actuarial rate of return margin does not have the same simple
interpretation as the dual rate margin, as the after-tax margin cannot be added
to the pre-tax cost of funds to produce a meaningful yield figure.
See also:
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