Question

If you as a business owner know that your bank will provide financing for a project and that the cash generated from the project must cover the loan payments, would you then have to include financing in your capital budgeting decision? Why or why not?

Answer 1

If the project is finance through bank loan then there would be periodical interest and loan payment which would indicate cash outflow and since the loan is taken specifically for the project, these should be included in capital budgeting. Interest expense would provide tax shield and would help company to find out the actual net cash flow from project. By including financing the correct net present value of project can be determine and would help to make better decision related to project.