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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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December 9, 2015 at 12:52 pm #289581
Roisin
Member
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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
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- Topics: 57
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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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