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In APV method i know that i can use risk free rate or rate of normal borrowing to calculate Annuity Factor to use it in calculation of PV of tax saving due to interest and in PV to saving on subsidised loan but i don’t know the reason behind using any of this two rate that should write in my exam paper as i have to state clearly why i m using any of this rate.
So can you please tell me the reason for using Risk free rate or Normal borrowing rate to calculate Annuity Factor???
And another thing can i use 3% rate that Bahari Govt will charge on subsidised loan to calculate Annuity Factor to use it in calculation of PV of tax saving due to interest and in PV to saving on subsidised loan??
I do explain this in my free lectures!!!
The rate used should be the rate that reflects the level of risk.
Using risk free rate assumes that the tax saving carries no risk.
Using the normal borrowing rate assumes that the tax saving carries the same risk as the debt interest itself.
There is an argument for using the subsidised rate, but don’t use it in the exam.
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