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The answer to this question completely neglects interest cash flows (outflows) of $240,000 per year in the NPV calculation. Does anyone know why they are excluded?
The other items listed all have specific inflation rates with the exception of this. At the bottom you are given the real and nominal after tax costs of capital, so I used the Fisher formula to calculate the general rate of inflation as 5% (to the nearest percent) and then inflated the interest charges at this rate. Hence I got the answer wrong.
Anyone?
the question is asking you to evaluate the calculation. The interest should not be included in the calulation, hence does not form part of the answer
The interest will form part of the cost of capital
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So interest charged in a project that is going to be appraised through NPV should be ignored as it is already accounted for as the cost of capital?
Well, not ignored as such. The cost of capital used for the project will be derived from working out the cost of debt (interest paid on the funding) and the cost of equity (if any, plus any other forms which would be WACC)
I cant remember the question now, but it didnt mention a project specific cost I don think, hence the cost of debt will be taken account in the COC the company uses
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