[jcw1503]

This may be a stupid questions but I will ask it anyways????

In Capital Budgeting there are 2 formulas that I am wondering about:

The IRR is the Investment/After Tax Annual Cash Inflow

and

After-Tax Payback Method is Investment/Annual Cash Flow

What is the difference in the cash flows?

Thanks.

FAR - Attempt 1-(70)...Attempt 2 (Passed Baby)-Praise the Lord-Couldn't have done it without him.
AUD- Attempt 1-Passed!!!!!!!!! )-Praise the Lord-Couldn't have done it without him.
REG-Attempt 1-(73)...Attempt 2 (Passed Baby)-Praise the Lord-Couldn't have done it without him.
BEC-Attempt 1-(71)...Attempt 2 (Passed Baby)-Praise the Lord-Couldn't have done it without him.

****What is one Golden Rule for Passing the Exam? 1) Read the question properly. and 2) Leave yourself enough time to answer all of the....
****Success seems to be connected with action. Successful people keep moving. They makes mistakes, but they don't quit.
****Success is the sum of small efforts, repeated day in and day out.

[Anonymous]

Honestly, I don't have the book in front of me so I cant be 100%, but I'm pretty sure IRR doesn't take into consideration the tax affect, it is only the discounted (PV) amount that is factored into the equation to get the rate. The after tax payback method does take into consideration the after tax cash flows.

The IRR is a rate, the PB method is the amount of time it takes to get back your money.

[Whatdidyou]

I got this! (BEC is so much funner than FAR):

The internal rate of return (IRR) is the discount rate that makes the Present value of the investment = 0. Hence the formula you posted is the algebraic equivalent of this: Annual Net Cash Flow X PV of annuity factor = PV of Investment. You are solving for the discount factor/IRR. Your answer will be a percentage.

The payback method simply determines the number of years it takes for you to receive cash flows equal to the initial investment. Also this method does not take into account the time value of money nor any other cash flows after you've reached your “payback time” has been acheived.

Like Chris said your answers will be very different. I thought that the IRR took tax effects into consideration but could be wrong.

REG - Passed!!
BEC - Passed
FAR - Passed
AUD - Passed

Study Materials: Becker basic course

[Jeremy]

Both use net cash flow after taxes.

B- 8/13/2012- 92
A- 7/19/2012- 83
R- 5/30/2012-82
F- 7/3/2012- 90

[Roxwella]

I think your confused. IRR and NPV use the same procedures up to the last step (the formula you have for IRR is one possible way of figuring it out..but only for a one year period. IRR takes into account time value of money…). Check out this explanation https://www.investinganswers.com/financial-dictionary/investing/internal-rate-return-irr-2130 . Since both methods are taking into account the cash flows aspect of the operation, they both take into account tax savings from depreciation…but you must be careful as to the wording of the question.

When calculating IRR you end up with a variable for discount rate your trying to solve for..this ends up being the IRR, or the rate of return that the company should expect. What you have to do is figure out what rate of return is required to yield 0 NPV (so PV of future cash flows = original investment).

Notice that you have written “The after tax payback method”..Id expect that your annual cash flow in an “after tax” situation would also take into account the savings in cash flow from tax.

[jcw1503]

Thanks….

FAR - Attempt 1-(70)...Attempt 2 (Passed Baby)-Praise the Lord-Couldn't have done it without him.
AUD- Attempt 1-Passed!!!!!!!!! )-Praise the Lord-Couldn't have done it without him.
REG-Attempt 1-(73)...Attempt 2 (Passed Baby)-Praise the Lord-Couldn't have done it without him.
BEC-Attempt 1-(71)...Attempt 2 (Passed Baby)-Praise the Lord-Couldn't have done it without him.

****What is one Golden Rule for Passing the Exam? 1) Read the question properly. and 2) Leave yourself enough time to answer all of the....
****Success seems to be connected with action. Successful people keep moving. They makes mistakes, but they don't quit.
****Success is the sum of small efforts, repeated day in and day out.

[Author]

Replies