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:
![\mathbf{0= NPV \sum \limits ^{T}_{t=1} \dfrac{C_t}{(1+1RR)^t}- C_o}](https://tex.z-dn.net/?f=%5Cmathbf%7B0%3D%20NPV%20%5Csum%20%5Climits%20%5E%7BT%7D_%7Bt%3D1%7D%20%5Cdfrac%7BC_t%7D%7B%281%2B1RR%29%5Et%7D-%20C_o%7D)
where;
= net cash inflow for a time period (t)
Total initial investment cost
<h3>(a)</h3>
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:
![\mathbf{0 = \dfrac{60000}{(1+r)^1}+ \dfrac{60000}{(1+r)^2}+ \dfrac{60000}{(1+r)^3}+ \dfrac{80000}{(1+r)^4}}](https://tex.z-dn.net/?f=%5Cmathbf%7B0%20%3D%20%5Cdfrac%7B60000%7D%7B%281%2Br%29%5E1%7D%2B%20%5Cdfrac%7B60000%7D%7B%281%2Br%29%5E2%7D%2B%20%5Cdfrac%7B60000%7D%7B%281%2Br%29%5E3%7D%2B%20%5Cdfrac%7B80000%7D%7B%281%2Br%29%5E4%7D%7D)
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:
![\mathbf{=60000 -(60000\times 0.3) } \\ \\ \mathbf{ = 60000 -18000} \\ \\ \mathbf{ = 42000}](https://tex.z-dn.net/?f=%5Cmathbf%7B%3D60000%20-%2860000%5Ctimes%200.3%29%20%20%7D%20%5C%5C%20%5C%5C%20%5Cmathbf%7B%20%3D%2060000%20-18000%7D%20%20%5C%5C%20%5C%5C%20%5Cmathbf%7B%20%3D%2042000%7D)
For the fourth year, the cash inflow is
![\mathbf{=80000 -(60000\times 0.3) } \\ \\ \mathbf{ = 80000 -18000} \\ \\ \mathbf{ = 62000}](https://tex.z-dn.net/?f=%5Cmathbf%7B%3D80000%20-%2860000%5Ctimes%200.3%29%20%20%7D%20%5C%5C%20%5C%5C%20%5Cmathbf%7B%20%3D%2080000%20-18000%7D%20%20%5C%5C%20%5C%5C%20%5Cmathbf%7B%20%3D%2062000%7D)
Using the above IRR formula:
![\mathbf{0 = \dfrac{42000}{(1+r)^1}+ \dfrac{42000}{(1+r)^2}+ \dfrac{42000}{(1+r)^3}+ \dfrac{62000}{(1+r)^4}}](https://tex.z-dn.net/?f=%5Cmathbf%7B0%20%3D%20%5Cdfrac%7B42000%7D%7B%281%2Br%29%5E1%7D%2B%20%5Cdfrac%7B42000%7D%7B%281%2Br%29%5E2%7D%2B%20%5Cdfrac%7B42000%7D%7B%281%2Br%29%5E3%7D%2B%20%5Cdfrac%7B62000%7D%7B%281%2Br%29%5E4%7D%7D)
By solving the above equation:
r = 19.32%
Learn more about the internal rate of return (IRR) here:
brainly.com/question/24301559