Question

I need to determine whether it would be beneficial to take on a new project or not. The cost of the new equipment for the expansion is 350000 and a loan loan from the bank will be needed for this. Repayments of 7k per month will be required. Do I include the 7k monthly repayments in the operating cash flow model even if the 350000 has already been listed as the initial investment? Or are the repayments considered a financial cost that should be excluded?

Answer 1

Absolutely not.

Any financing cost or payment will not form part of of cash flow. Simple reason for this is the calculation of the discount rate have already factored in the financing cost.

Usually we use WACC as the discount rate and calculation of WACC include both debt and Equity. Since debt has already been taken care off in WACC, no need to include that in cash flow

If we subtract the cash flow with the interest of debt repayment and discount it by WACC, we are double counting the effect of debt. This will lead to higher number of rejection of projects where some of them might not be bad.

I hope it is clear now. Let me know if you have any doubts