CT2- Project appraisal

Suppose a company take a loan to invest in a project where the project involves purchasing of a fixed asset. We need to calculate the NPV.
Why we don't consider the interest on loan in NPV calculation ?
Shouldn't it be deducted from the annual cash inflows from the project?

I came across a question where the rate of interest on loan is 6% and the risk discount rate is 8%. They haven't taken into account the interest on loan in NPV calculation. Why?

Please help asap.
Thank you!

 

Anyone please asap.

 

In page 17 in Ch 1 of the CMP notes, the Core Reading states that simply asking whether the return on a project is greater than the cost of borrowing the funds needed to finance it only shows whether that project will increase value rather maximise shareholder value. I had that in mind when I chose the 8% risk discount rate not the 6% loan rate.

By the way, this is the Sep 2015 exam Q3 (UK)? I agree it was a tricky question and I am about to post a question relating to the depreciation aspect of it! They sure don't make these multiple choice questions straightforward at all!

 

Yes, it is Sept 2015, Q3 (IFoA). About depreciation, we can say that it is not a cash outflow but it decreases the annual profits. The qus says that, ' The machine will increase the reported profit by 11,000' but we know that the depr. has decreased the profit by 40,000/5 = 8000 pa. So, we need to add it back to the profit to calculate NPV as NPV is a cash basis method.

So, annual cash inflow will be (11000+8000), and NPV eq. is :
= -40,000+19000a-5. @8%

Although the ans is differ by $5.5 by this method.