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which rate should we take calculating susbidy benefit as i have noticed diff rates in diff questions
The subsidy benefit is the difference between the normal rate of interest on borrowing and the subsided rate of interest.
As far as the discounting is concerned you can discount at either the risk free rate or the normal interest rate on borrowing. The examiner always accepts either (even though obviously the final answer is different. I explain the argument for each of the rates in my free lectures on this.
so when we are calculating the benefit we dont have to take the difference between these rates just one of the risk free rate or normal borrowing rates right?
First question: You do take the difference between the two rates. It is the discounting that can be done at either the risk free rate or at the normal cost of borrowing.
Second question: The tax relief lost is the tax rate as applied to the subsidy benefit, discounted again at either of the two rates.
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