Discussion of the Pre and Post-Tax Discount Rates and Cash Flows: A Technical Note
Journal of Applied Research in Accounting and Finance (JARAF), Vol. 5, No. 1, pp. 16-20, 2010
12 Pages Posted: 9 Aug 2010
Date Written: August 9, 2010
Lonergan (2009) appropriately recommends that “discounted cash flow analysis should be configured on the basis of post-tax cash flows discounted with post-tax discount rates”. We generally agree with his recommendation when it is applied in discounted cash flow valuations, due to accounting conventions that affect post-tax cash flows. However, we show that when valuing cash flows with a well-defined marginal corporate tax rate, the present value of pre-tax cash flows discounted at a pre-tax discount rate exactly matches the present value of post-tax cash flows discounted at a post-tax discount rate. We present analytical examples to demonstrate this equality.
Keywords: discounted cash flow analysis, post-tax cash flow, post-tax discount rate
JEL Classification: M40, M41
Suggested Citation: Suggested Citation