Question

What is the approximate after-tax IRR on a two-year project for which the first cost is $11,000, savings are $5,000 in the first year and $10,000 in the second year, and taxes are at 40 percent? The approximate after-tax IRR is ________ %.

Answer 1

The approximate after-tax IRR on the two-year project is approximately 18.9%.

Step-by-step explanation:

The approximate after-tax IRR on a two-year project can be calculated by subtracting the taxes from the savings and then finding the rate that would equalize the initial cost with the after-tax savings. In this case, the first cost is $11,000 and the savings are $5,000 in the first year and $10,000 in the second year. If taxes are at 40 percent, we can calculate the after-tax savings as follows:

Savings after taxes = savings x (1 - tax rate)

Savings after taxes = $5,000 x (1 - 0.40) + $10,000 x (1 - 0.40) = $3,000 + $6,000 = $9,000

The after-tax IRR can then be found by solving the equation:

$11,000 = $9,000 / (1 + IRR) + $9,000 / (1 + IRR)^2

To solve this equation, we can use trial and error or an approximation method such as the quadratic formula. The approximate after-tax IRR for this project is approximately 18.9%.