calculating the pv of tax shield

This topic has 3 replies, 2 voices, and was last updated 3 years ago by John Moffat.

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- June 21, 2017 at 5:54 am #393636
  
  Vipin
  Member
  
  In calculating the pv of tax shield in APV.
  they find the tax relief and then multiply with annuity factor and then discount it again.
  
  when it is multiplied with annuity factor, it is already discounted and then again discounting it with same discount factor looks weird.
  
  Why is it done so?
- June 21, 2017 at 6:46 am #393641
  
  John Moffat
  Keymaster
  
  The tax shield is not discounted twice.
  
  The tax benefit is the tax saving on the interest each year. So, for example, if the debt is redeemable in 10 years time then there will be a tax saving on the interest each year for 10 years and so to get the PV you multiply by the 10 year annuity factor.
  
  If you think a particular question has done differently, then say which question and I will explain.
- June 21, 2017 at 7:21 am #393644
  
  Vipin
  Member
  
  I am using kaplan study text. They do it when tax payment is delayed one year. only for such case, they do discounting two times. I just noticed the difference now.
- June 21, 2017 at 10:57 am #393659
  
  John Moffat
  Keymaster
  
  That does now make sense 🙂
  
  The 10 year annuity because there are 10 years of interest, and then 1 years discounting because the annuity starts 1 year late.
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