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Kaplan KIt- Sec c- Investment appraisal
– ii) in this qs asked to calculate NPV.
Data given- project is financed by issuing of 8% loan notes, reedemable in ten year time.
Nominal wacc(after tax) = 10%, real rate wacc= 7% and cost of equity = 11%.Doubt——–x———-
IF project is financed by debt, 8% loan notes, then why it is not discounted at this.
Why they have took wacc.and also i see in some qs where they mention before tax cost of capital and after tax cost of capital, in which scenario which cost of capital i should consider..
please help in this concept. Thankyou
When calculating the NPV of a project, the appropriate discount rate to use is typically the company’s Weighted Average Cost of Capital (WACC), even if the project is financed by debt. Must consider debt & equity.
WACC represents the average rate of return required by all of the company’s investors (both debt and equity holders). It reflects the overall cost of financing the company’s operations and investments.
Using WACC ensures that the risk and return expectations of both equity and debt holders are considered. Financing a project with debt does not eliminate the need to consider the cost of equity, as equity holders still bear residual risk.Use WACC: For NPV calculations, use the company’s WACC to reflect the overall cost of financing.
After-Tax Cost: Use the after-tax cost of capital for discounting cash flows.
Lease v buy – use after taxBefore-Tax Cost: Use the before-tax cost of capital for calculating the market value of debt.
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