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Dear john thank you for your guidance and quick answers i still have some concerns about using tax saved on interest in my Npv with data as follows :
-$10 million amortised bank term loan with a prevailing interest rate of 6%
-Based on current market rates of return,tax weighted wacc 12%
-inflation 3.5%
-tax rate 30%
-project 10 years
so if i am using dcf of 12 % for NPV after inflating my revenues and costs how im i supposed to deal with the tax saved on interest is it discounted at 12 % (180000 per year?)
The net (after-tax) cost of the bank loan (i.e. 6% x 0.7 = 4.2%) will have been included in the WACC calculation.
We never include either the interest payments or the tax saving on them in the cashflows. To do so would be accounting for it twice.
(I don’t know if you have studied the WACC calculations yet, but when you do you will see it includes the after-tax cost of all sources of finance – be it equity or debt borrowing.)
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