A
major benefit of the Tax Cuts and Jobs Act of 2017 is that it reduces taxes
paid, which increases operating cash flow. Increased cash flow can increase the
NPV of a project, even turning a negative NPV to a positive NPV, and increase
the overall value of a company. Since the value of a project or the value of a
company are both based on the present value of future cash flows, this result
is fairly obvious. As a recent article points out, what is less obvious is that
the reduced tax rate will also increase the required return on a project or a
company. Since the cost of debt that is important for either valuation is the
aftertax cost of debt, a reduced tax rate actually makes the cost of capital
higher, all else the same. So, in discounting higher future cash flows with a
higher cost of capital, the present value will not increase as much as you
might think at first glance.
