Incorporating flotation costs into the analysis of a project will:
A) cause the project to be improperly evaluated.
B) increase the net present value of the project.
C) increase the project's rate of return.
D) increase the initial cash outflow of the project.
E) have no effect on the present value of the project.

Question

Quizplus · Accepted Answer

Flotation costs are the costs associated with issuing and selling new securities, and they represent an additional cash outflow for the firm. Incorporating flotation costs into the analysis of a project will increase the initial cash outflow of the project, which is reflected in the calculation of the net present value of the project. This is because the net present value formula discounts future cash flows to their present value using a discount rate that includes the flotation cost. Therefore, the project's net present value will be lower when flotation costs are included, and the initial cash outflow of the project will be higher.

Incorporating Flotation Costs into the Analysis of a Project Will