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Can you pls tell ans if we use government rate of 3.1% as df.
Why annual installment is 70/ af for 4 years @ 8% why not 70/4 , pls explain logic?When to use risk free rate or debt rate as df?
At 3.1% the PV of the tax shield on the subsidised loan is 2,758,921. The other figures stay the same.
However borrowing is repaid, the present value of the repayments of principal and interest must equal the amount of the borrowing. Therefore when there are equal repayments each year, the amount of the annual repayment multiplied by the annuity factor will equal the amount of the borrowing. Therefore the annual repayment equals the amount of the borrowing divided by the annuity factor.
I explain in my lectures on APV that you can always either discount the tax shield at the debt rate or the risk free rate. There is a logic for both as again I explain in the lectures, and the examiner always accepts either.
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