Let’s assume that the real rate of return is a constant 20%. If inflation is 50%, then the nominal rate of return is 80% (because (1+0.50)*(1+0.20) = 1.80). Therefore, you get $180 over a one-year period for a $100 investment. 

Assuming income taxes to the tune of 40%, compute the real value of your investment (after taxes on nominal income have been paid) at the end of the year. 

Now contrast the same scenario but without any inflation, what would the value of your investment be at the end of the year. What lesson can we learn comparing these two scenarios?

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Real value of investment Maturity value Invested Amount 1 tax rate 18... View the full answer