If debt is to be used to finance a project, then when cash flows for a project are estimated, interest payments should be included in the analysis.

Question

Quizplus · Accepted Answer

Interest payments are not included in the cash flow analysis because cash flows are analyzed on a pre-financing basis. Financing effects are accounted for separately when calculating the net present value (NPV) or internal rate of return (IRR) by using the cost of capital, which reflects the cost of debt and equity.

If Debt Is to Be Used to Finance a Project