BCZ85 In theory, discounting post‑tax cash flows at a post‑tax discount rate and discounting pre‑tax cash flows at a pre‑tax discount rate should give the same result, as long as the pre‑tax discount rate is the post‑tax discount rate adjusted to reflect the specific amount and timing of the future tax cash flows. The pre‑tax discount rate is not always the post‑tax discount rate grossed up by a standard rate of tax.
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Example |
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This example illustrates that a post‑tax discount rate grossed‑up by a standard rate of tax is not always an appropriate pre‑tax discount rate. At the end of 20X0, the carrying amount of an asset is 1,757 and its remaining useful life is 5 years. The tax base in 20X0 is the cost of the asset. The cost is fully deductible at the end of 20X1. The tax rate is 20%. The discount rate for the asset can be determined only on a post‑tax basis and is estimated to be 10%. At the end of 20X0, cash flow projections determined on a pre‑tax basi |