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Investment Appraisal and the post tax cost of capital

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Investment Appraisal and the post tax cost of capital

  • This topic has 1 reply, 2 voices, and was last updated 9 years ago by John Moffat.
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  • Author
    Posts
  • December 9, 2015 at 12:52 pm #289581
    Roisin
    Member
    • Topics: 14
    • Replies: 31
    • ☆

    Dear John,
    From my studies I understand that when an NPV question considers cash flow of tax deductions and allowances that I should adjust the cost of capital ( eg. tax is 25%, then i should use the discount factor of 9%.) And where tax is ignored, we use the pre tax rate.

    I have found practice questions that don’t do this tax adjustment to the discount factor so I am confused. Could you please enlighten me?

    Many many thanks for you continued support.
    Roisin

    December 9, 2015 at 1:11 pm #289590
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54675
    • ☆☆☆☆☆

    It is only the cost of debt that is affected by tax, so you can’t simply take the pre-tax WACC and then take off the tax.

    Without seeing the questions you refer to then I cannot really help more.

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