Other Cost
Other
cost is typically means the acquisition cost of raising equity Finance, or cost
of raising debt finance. This cost does not directly related to project,
however, incurred in connection of project. This cost does account for in
adjusted present value method.
PV of Other Cost
Discounted
Value of Other cost is known PV of other cost. Such costs are discounted using
risk free rate of debt, unless otherwise identified in the question or exam.
Important Factor for PV Calculation
1. Rate
used is Risk Free Rate of Debt
2. Tax
Relief is considered (Tax relief is discounted)
3. Issue
Cost is normally at Year 0 (no discounting Required)
PV of Other Cost Example
Company
wants to raise finance of 30 million. Cost of raising finance is 7%. Company
wants 30 million after deducting issue cost. Risk free rate is 9%. Tax rate 30%
1.
Issue
Cost
30/.93
= 32.25
Total
raised 32.25
Debt (30)
Issue
Cost 2.25
Issue
Cost 2.25
2. Tax relief
Tax
relief @ 30% 2.25= .675
Discounted
.675x (1.09)-1= .619
2.
PV Cost
Issue Cost =
(2.25)
Tax Relief
= .619
1.631 million
