NPV analysis and Interest expense?

Question

Are interest expenses considered in the cash flows of a NPV analysis? That is, would the NPV be different if funds would have to be borrowed vs. the project paid for using existing cash? Or is the cost of funds implied in the discount rate chosen? Can you point me to an example, I have never seen this used in practice.

Answer 1

the cost of funds used is usually the weighted average cost of capital and thus interest expense is excluded from the analysis.

this divides the capital project's "go-no go" decision from the financing decision [which is usually someone else's lookout].

The possible exception occurs when part of the project consists of leased assets where the lease is considered a financing lease.

[In that case, it is proper to adjust the figures to what they "should" be if you bought the asset outright and then sold it at the end of the period. Since you'll have to capitalize the leased asset anyway, interest at your usual cost should be deducted from the lease expense (the resulting positive amount is an estimate of the value of the other leasing services (depreciation, repairs, etc.) and are still part of the project cost).]

Answer 2

One of the quarterly financial reports any publicly traded company is required to disclose to the SEC and the public. The document provides aggregate data regarding all cash inflows a company receives from both its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given quarter. Investopedia Says: Because public companies tend to use accrual accounting, the income statements they release each quarter may not necessarily reflect changes in their cash positions. For example, if a company lands a major contract, this contract would be recognized as revenue (and therefore income), but the company may not yet actually receive the cash from the contract until a later date. While the company may be earning a profit in the eyes of accountants (and paying income taxes on it), the company may, during the quarter, actually end up with less cash than when it started the quarter. Even profitable companies can fail to adequately manage their cash flow, which is why the cash flow statement is important: it helps investors see if a company is having trouble with cash.