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In(ii), Bahari project
When calculating the PV of tax saving and subsidy, it uses the 7% for discounting. Why not 3%, which is the cost of the subsidy debt?
Or can it use 4%, the risk free rate of return?
The PV of the tax savings can either be calculated at the actual cost of debt (before any subsidy), so 7% in this case, or at the risk free rate of, in this case, 4%.
There are arguments for both and the examiner always gives full marks for either (even though obviously the final answer will be different).
Just make sure (as always) that you set out your workings clearly so that is obvious to the market what you have done.
Ok, get it. It’s the rule. Thank you, sir.
You are welcome 🙂