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Hello Mr. Moffat,
Hope you are fine and thank you for your nice lectures.I have a question regarding interest cost in NPV. I know we should ignore interest cost because in fact we are discounting. But what if they are not the same?!
I mean if we borrow a money with interest = 10% and the cost of capital is also 10% so here they are the same so we have to ignore it.
But what if they are not the same? for example we borrow the money with interest = 10% but the cost of capital becomes 8% ( say for example because of cheaper cost of equity). So here the interest is 2% more than cost of capital which is used for discounting. We should ignore it in this case too?? if yes, why?
Thank you
We always ignore interest in the cash flows.
The WACC will always be different than the cost of debt in the company, but the calculation of the WACC always includes the interest cost of debt. (I don’t know if you have got as far as the lectures on the calculation of the cost of capital yet).
Given that the cost of capital takes account of the cost of debt, to include the interest in the cash flows would be accounting for it twice.
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