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In the ACCA CBE Specimen Paper, MTQ 1, a part asks us to identify if certain costs are relevant or not. Regarding interest, the question informed:
– Interest on money borrowed to finance the project would cost $150,000 per annum.
However, the answer indicates that this interest is NOT relevant (as I’d presumed, considering if the project were not to be continued with, there would be no money borrowed for it, so no interest paid). Please explain why.
Thank you.
In future you must ask in the Ask the Tutor Forum if you want me to answer.
Interest is not relevant in arriving at the cash flows because the discounting is taking account of the interest – that is the reason we discount.
If interest was included in the cash flows as well, we would be accounting for it twice.I shall take care of that in the future.
And thank you for the answer. I understand it perfectly now.
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