Optimal tax design in contingent on assumptions on corporate investment behaviour. The Norwegian Ministry of Finance presumes separate discounting (risk free) of the tax credit resulting from investments when calculating the net present value of oil and gas projects. However, textbooks in finance focus on calculating net present value by discounting the expected net after tax cash flow using the weighted average cost of capital as the discount rate. This is also the method used by the oil companies when estimating project net present value. We examine the method of calculating the net present value of oil projects using two methods of separating cash flow streams. We demonstrate the results on three different oil model fields. With the assumption of value additivity the Norwegian Ministry of Finance method of separating the tax shield resulting from the investments only, does not yield implied required rates of return for the uncertain residual cash flows. That is, the method in not implementable. The method of valuing the after tax investments separately gives reasonable implied discount rates for the after tax income and operating costs. Neither of the two separate cash flow valuation methods are recommended for practical valuation of projects.
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