Hi, I’m confused about the annuity factor used when calculating the financing effects in APV.
I understand that for the base-case NPV, we use the appropriate project discount rate. However, when calculating the financing effects (e.g. tax shields, subsidy benefits, etc.), I’m not sure which rate should be used in the annuity factor formula.
For example, if I need to calculate an annuity factor for a financing benefit over several years, should I use:
the risk-free rate,
the pre-tax cost of debt,
the interest rate used for subsidised loans, or
some other rate?
I’ve seen examples where different rates are used, and I’m getting confused about how to decide which rate to use for the AF in APV financing effects.
Please advise on this.