In discount projected tax savings in the adjusted present value method,the firm's unlevered cost of equity should be used,since it reflects a higher level of risk than either the WACC or after-tax cost of debt.Tax savings are subject to risk comparable to the firm's cash flows in that a highly leveraged firm may default and the tax savings go unused.

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The statement is true. Since tax savings are subject to the same risk as the firm's cash flows, the unlevered cost of equity, which reflects the higher risk of the firm without debt, should be used to discount projected tax savings. This is because a highly leveraged firm may default, and the tax savings may go unused if the firm goes bankrupt. Using the WACC or after-tax cost of debt would underestimate the risk associated with the tax savings.

In Discount Projected Tax Savings in the Adjusted Present Value