Financing Costs

In analyzing a proposed investment, we will not include interest paid or any other financing costs such as dividends or principal repaid, because we are interested in the cash flow generated by the assets of the project. As we mentioned in Chapter 2, interest paid, for example, is a component of cash flow to creditors, not cash flow from assets.

More generally, our goal in project evaluation is to compare the cash flow from a project to the cost of acquiring that project in order to estimate NPV. The particular mixture of debt and equity a firm actually chooses to use in financing a project is a managerial variable and primarily determines how project cash flow is divided between owners and creditors. This is not to say that financing arrangements are unimportant. They are just something to be analyzed separately. We will cover this in later chapters.

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