In Ch. 19 of CAIA: Advanced Core Topics in Alternative Investments, it is discussed that to arrive at PV of Depreciation Tax Shield should be sum of all the depreciation tax benefits discounted by Risk Free Rate. Any thoughts or arguments supporting or against Risk Free Rate or other rates?
MAkes sense to me. For a fixed depreciation schedule, the tax benefit is basically just additional cash on the balance sheet each year, and its more or less certain. I don’t see a reason to use a higher discount rate.
Technically, you can discount at whatever rate that is applicable to you or your firm, however, for the ease of the question. They picked the RFR. But I can see the question become…“the applicable discount rate for this investor is 20%, calculate the depreciation tax benefit”
People use multiple discount rates in models when the CFs have different risk associated with them. In this case, this is a fairly known thing, so RFR.
doesnt buffett advocate using one discount rate and then adjusting the result with a margin of safety instead of using different rates for cashflows of different risk?