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NPV Method Practice Question 1 (Lecture Notes PP153)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › NPV Method Practice Question 1 (Lecture Notes PP153)

  • This topic has 1 reply, 2 voices, and was last updated 14 years ago by John Moffat.
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  • April 17, 2011 at 4:36 am #48120
    zyywzh
    Member
    • Topics: 3
    • Replies: 6
    • ☆

    I am confused that why the interest is not included in the NPV calculation in PQ1?

    Could you please explain? Thanks!!

    April 25, 2011 at 5:29 pm #80894
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54675
    • ☆☆☆☆☆

    The reason is that the whole purpose of discounting is to account for the cost of capital (which includes the interest on any borrowing).
    To deduct interest in arriving at the cash flows would be accounting for it twice.
    You never show interest in the cash flows when calculating an NPV.

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