Posted by Denis Borris on September 23, 2002 at 00:07:06:
In Reply to: Ys .. but only ta (not irish..)... posted by Subhotosh Khan on September 22, 2002 at 19:03:57:
: First year the machine earns 77000 dollars
: Depriciation 27000
: total earnings before taxes = 50000
: tax = .33 * 50000 = 16.5 K
: After tax revenue = 77 - 16.5 K = 60.5 K
: Now when you are looking at the end of third year - shouldn't this
: amount be multiplied by (1+i)^2 .. assuming I did not put the
: money under my mattress (very uncomfortable situation)
AGREE!! BUT if you leave it at that, you're leaving the depreciation out:
(you're only using it as a deductible to calculate income tax)
hence your high rate compared to my low rate.
Your ending balance (end of 3 years) INCLUDES the original $81,000;
but that's an expense, and must be reflected in the IRR: in MY IRR anyway!
It all boils down to:
I walk in with after-tax dollars of $81,000;
3 years later, I walk out with after-tax dollars of $117,000;
end of scenario!
It does not matter HOW the $117,000 was arrived at: IT IS $117,000.
Again, my interpretation of IRR is NET after tax and depreciation.
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