The only post about this subject was a dead end. When evaluating a project, calculating net income involves deducting interest expense for the debt portion of the project financing. One of the CFAI sample exams calculates this amount, I believe, as: (initial cost of the project) x Debt % of financing x coupon rate on debt. Schweser Book 3 page 38 calculates interest expense as: (PV of future after tax cash flows) x debt % x debt rate. This seems like a discrepancy, unless I’m missing something. In the Schweser example, the initial outlay is 200,000, with 50% debt at a 6% rate, so I would think that the interest expense would be $6,000. Instead, they apply the (50% debt x 0.06) to the PV of the remaining cash flows. Any idea which is right?
when in doubt i go with cfai sample… havent seen any errata regarding it… I am really not sure tho
Not sure either, but you do use PV of future cash flows to determine Market Value in computing economic income (EI). EI = After tax CF + change in market value (i.e., MV_end - MV_beg). Now to find MV_beg, for any year, it is the PV of future cash flows, and MV_end becomes the value of next MV_beg, etc.