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Hi All,
I’m a bit confused as to when to use before or after tax in investment appraisal. Ordinarily, I understand that when we use “after tax flows” then we should adjust the discount rate for tax. But in the ACCA example in Advanced investment appraisal article, when real cost of capital (COC) was converted to nominal COC we did not adjust for tax, even after recognizing tax savings and TAD. I noticed in lease or buy questions we use after tax coc but when computing EAC, we use before tax COC…please can anyone help clarify?
We always use the after tax cost of debt when calculating the cost of capital. The article converts the real cost to the money/nominal cost and since the real cost must already be after tax then the nominal cost will automatically be after tax.
Tax is only ignored when calculating the return to investors, because investors are not affected by company tax.
I do suggest that you watch my free lectures on this. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
Thank you very much for the swift response…just to clarify, if we are not told to calculate WACC and just given cost of capital used to discount the cashflows, without any mention of it being “before” or “after” tax….do we assume it has already been adjusted for tax?
Thanks once again and I did watch the free lectures, they were very helpful.
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