Timber Plc have identified a 5-year capital investment project and are preparing a schedule of cash flows for the project to identify whether they should proceed with investment. If the project goes ahead, the company will raise a 5-year loan of €5 million to finance the project with an annual interest rate of 10%. How should the cash flows on the loan be treated in the schedule of project cash flows? Include interest cash flows in times 1 to 5 and repayment of loan principal at time 5. Include receipt of €5m at time 0, interest for times 1 to 5, and repayment at time 5. Do not include cash flows on the loan as they are a sunk cost Do not include cash flows on the loan as they are included in the cost of capital
Timber Plc have identified a 5-year capital investment project and are preparing a schedule of cash flows for the project to identify whether they should proceed with investment. If the project goes ahead, the company will raise a 5-year loan of €5 million to finance the project with an annual interest rate of 10%. How should the cash flows on the loan be treated in the schedule of project cash flows? Include interest cash flows in times 1 to 5 and repayment of loan principal at time 5. Include receipt of €5m at time 0, interest for times 1 to 5, and repayment at time 5. Do not include cash flows on the loan as they are a sunk cost Do not include cash flows on the loan as they are included in the cost of capital
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 3P
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Timber Plc have identified a 5-year capital investment project and are preparing a schedule of cash flows for the project to identify whether they should proceed with investment. If the project goes ahead, the company will raise a 5-year loan of €5 million to finance the project with an annual interest rate of 10%. How should the cash flows on the loan be treated in the schedule of project cash flows?
Include interest cash flows in times 1 to 5 and repayment of loan principal at time 5.
Include receipt of €5m at time 0, interest for times 1 to 5, and repayment at time 5.
Do not include cash flows on the loan as they are a sunk cost
Do not include cash flows on the loan as they are included in the cost of capital
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