MJ2018 Question on APV (Tippletine)

I assume that you are referring to the 5% used when calculating the benefit of the tax shield. As I explain in my free lectures there are arguments for either using the normal cost of debt or for using the risk free rate (and the examiner always allows either to be used). The question says that the normal cost of debt is 5% and therefore you can use either 5% or the risk free rate of 2.5%. Using any other rate here would be wrong.

The actual interest payable on the subsidised loan is 180 basis points less than 4.8%, so they are paying interest at 3%. The tax shield has been discounted at the normal cost of borrowing which is 6%, but the examiner has written that you could have used the risk free rate of 4.8% instead, just as I explain in my lectures.

In Mar/Jun 18 the question specifically says that the debt raised is just for the investment in the facilities.

In Amberle it would be fine to use the risk free rate.