[leah]

Hi mari,
Yes, the ungeared cost of equity is used, because the projects are fully funded out of debt.

If the projects are 100% debt financed, the tax saved from the use of debt would be significant. Therefore, we’re expected to estimate the impact of such a benefit on the project.

Before doing that, we need to separate the impact of debt financing and calculate the NPV of the project as if it is all-equity financed(so called base-case NPV). Therefore, asset beta is used to drive ungeared cost of equity, and this is used as discount rate.

[Author]

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