Suppose that after-tax investment is defined as the investment outlay minus the present value of future depreciation tax shields. In the guano project, for example, after-tax investment would be $10,000,000 – 2,174,000 +$7,826,000. This figure would be entered as the investment outlay then future cash flows would be calculated ignoring depreciation.

a. Does this change in format affect bottom-line NPV? Does the format have any advantages or disadvantages?

b. This format requires discounting depreciation tax shields separately. What should the discount rate be? Note that depreciation tax shields are safe if the company will be consistently profitable.

c. If depreciation tax shields are not discounted at the ordinary cost of capital, should the discount rate for the other cash flows change? Why or why not?