corporate finance (CFA level 1 )

Posts: 1
Joined: Mon May 30, 2016 5:32 am

corporate finance (CFA level 1 )

Postby chatterg11 » Sun Mar 26, 2017 6:35 pm

Please explain the fifth principle of capital budgeting. I am not being able to understand why we are not considering the financing cost specific to the project when estimating incremental cash flow?


Finance Junkie
Posts: 745
Joined: Wed Apr 09, 2014 6:28 am

Re: corporate finance (CFA level 1 )

Postby edupristine » Mon Mar 27, 2017 10:26 am

Hi Chatterg,

Financing costs are ignored.This may seem unrealistic, but it is not. Most of the time, analysts want to know the after-tax operating cash flows that result from a capital investment. Then, these after-tax cash flows and the investment outlays are discounted at the “required rate of return” to find the net present value (NPV). Financing costs are reflected in the required rate of return. If we included financing costs in the cash flows and in the discount rate, we would be double-counting the financing costs. So even though a project may be financed with some combination of debt and equity, we ignore these costs, focusing on the operating cash flows and capturing the costs of debt (and other capital) in the discount rate.

Return to “CFA Level I”


Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to and we will rectify it.