Why are interest charges not deducted when a project's cash flows for use in a capital budgeting analysis are calculated?
submitted by Gary

whytho

Interest isn't included in the project cash flows because those cash flows are meant to show the project's performance, not the costs of financing. If you included interest, it would double count the cost, since financing costs are already included in the discount rate used in NPV calculations.

squibbles

Interest charges aren't deducted from a project's cash flows because they're considered a financing expense, not an operational cost.

When you're looking at a project to see if it's viable or not, you look at the project's cash flow. We're not really concerned about how it was financed, just whether or not it was profitable.