CFA Level I · CFA Level I Exam · Capital Investments and Capital Allocation
When estimating incremental cash flows for a proposed capital project, which of the following items is most likely excluded from the analysis?
Interest expense on project debt is excluded from incremental cash flows because financing costs are captured in the discount rate. Including it would double count the cost of capital. Working capital needs and cannibalized sales are real incremental effects of the project and belong in the analysis.
- AInterest expense on debt used to fund the projectCorrect
- BAdditional working capital needed to support higher sales
- CLost revenue on an existing product that the new project replaces
Explanation
Financing costs such as interest are reflected in the discount rate (the cost of capital), so including them in cash flows would double count them. Working capital investment and cannibalization are incremental effects of the project and must be included.
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