Spacevoyage Inc. is considering the installation of a new experimental laboratory which requires a key equipment costing $5,000,000. It is expected that the equipment will generate important experimental material worth $2,000,000 for each of the next 5 years. In the 6^th year, the equipment will need an upgrade costing $2,500,000. Required return for this project is 15%.

Question1

While computing the cost of equity using the formula , r_s=D₁/P₀+g we do not make any adjustment to express the cost of equity on an after-tax basis whereas while computing the cost of debt, a tax adjustment is required to arrive at after-tax cost of debt. Why is this so? Explain briefly. (75-150 words)