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I learnt that if we ignore taxation when calulating EAC, we should use before tax WACC . But I just wonder the effect when we ignore capital allowance.
I assume that you are referring to Replacement questions.
You only ignore taxation is the question specifically tells you to, and if there is no taxation then there won’t be any capital allowances, and tax will be ignored in the calculation of the WACC 🙂
(Obviously it is not practical, and usually do you include tax in both the cash flows and in calculating the WACC, but if the questions says to ignore then we ignore 🙂 )
In general, not getting the benefit of capital allowance on its own will make a project less worthwhile. However when comparing different replacement periods it is impossible to know in advance whether or not it will affect the replacement period – it would still mean calculating the EAC for each possibility.
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