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Dear Sir,
I would like to ask for the base case npv, why we do not deduct the interest cost before discounting it with the ungeared cost of equity?You must ask in the Ask the Tutor Forum in future if you want me to answer – this forum is for students to help each other.
With APV, the base case NPV is calculated assuming that it is all equity financed (so no interest). As per Modigliani and Miller, the only benefit of using debt is because of the tax relief on the interest and this is dealt with separately in arriving at the APV.
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