Question

I need to come up with an argument to oppose the statement:

"Your book says that cost of financing a project are not relevant cash flows for the purposes of evaluating whether a project is worth taking or not."

Any help with this would be great, thank you.

Answer 1

As feasibility study has been done just for the project evaluation whether the project should be taken or not, this should be relevant cash flow. Because if the company did not take this projecg or think about taking this project the company would not have spent this amount. This amount is fully attributable to this project only. Many projects would have very high feasibility study cost and high positive NPV and many projects would have low feasibility study cost and low positive NPV. Or some projects might have equal NPVs but different feasibility study cost. So if one ignores feasibility study cost one might accept a worse project (low feasibility study cost adjusted NPV).