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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  

Jan Jindra

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis

Torben Voetmann

The Brattle Group; University of San Francisco

Date Written: August 9, 2010

Abstract

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

Jindra, Jan and Voetmann, Torben, Discussion of the Pre and Post-Tax Discount Rates and Cash Flows: A Technical Note (August 9, 2010). Journal of Applied Research in Accounting and Finance (JARAF), Vol. 5, No. 1, pp. 16-20, 2010. Available at SSRN: https://ssrn.com/abstract=1655691

Jan Jindra (Contact Author)

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis ( email )

44 Montgomery Street
San Francisco, CA 94104
United States

Torben Voetmann

The Brattle Group ( email )

201 Mission Street
Suite 2800
San Francisco, CA 94105
United States
415-217-1000 (Phone)

HOME PAGE: http://www.brattle.com

University of San Francisco ( email )

2130 Fulton Street
San Francisco, CA 94117
United States

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