Suppose the exchange rate is 10 pesos per dollar and you use $1000 to purchase a one-year mexican bond that pays 10% interest. N
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The before-tax IRR is 37.93%
The after-tax IRR is 19.32%
The internal rate of return (IRR) is defined as the return rate on a project investment project over a periodic lifespan.
It is also referred to as the net present value of an investment project which is zero. It can be expressed by using the formula:
where;
= net cash inflow for a time period (t)
Total initial investment cost
For the before-tax IRR:
The cash outflow = $120000
Cash Inflow for the first three years = $60000
Cash inflow for the fourth year = $60000 + $20000 = $80000
∴
Using the above formula, we have:
By solving the above equation:
r = 37.93%
<h3>(b) </h3>For the after-tax IRR:
The cash outflow = $120000
Recall that:
- Cash Inflow = Cash inflow × Tax rate
∴
For the first three years; the cash inflow is:
For the fourth year, the cash inflow is
Using the above IRR formula:
By solving the above equation:
r = 19.32%
Learn more about the internal rate of return (IRR) here: