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Investment Appraisal

RR10y ago
Dear lecturer, Could you tell me when we have to take the interest on money borrowed to finance the project as a relevant cash flow when calculating net present value ? Is interest on loan a non cash flow when we calculate net present value ? Why/ Why not ? Usually, is there anything that we have to consider as non relevant cash flow ?
John MoffatJohn MoffatTutor10y ago#1
Interest is never a relevant cash flow. We take account of it in the discounting (the cost of the interest is used in the calculation of the cost of capital (although calculating it is not required in Paper F2)) and so to have it as a cash flow as well would be dealing with it twice :-) Otherwise we are interested in all future, extra (incremental) cash flows as a result of doing the project.
RR10y ago#2
Thank You ! Lecturer
John MoffatJohn MoffatTutor10y ago#3
You are welcome :-)
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