Suppose a financial manager is quoted as saying. $$Our firm uses the stand$-$alone principle. Because we treat projects like mini$-$firms in our evaluation process, we include financing costs because they are relevant at the firm level. $$Critically evaluate this statement.

Management$$s discretion to set the firm$$s capital structure is applicable at the firm level. Since any one particular project could be financed entirely with equity, another project could be financed with debt, and the firm$$s overall capital structure would remain unchanged, financing costs are not relevant in the analysis of a project$$s incremental cash flows according to the stand$-$alone principle.

Management does not have the discretion to set the firm$$s capital structure at the firm level. The Board of Directors is the only entity that has authorization to change the firm$$s capital structure. Since any one particular project could be financed entirely with equity, another project could be financed with debt, and the firm$$s overall capital structure would remain unchanged, financing costs are not relevant in the analysis of a project$$s incremental cash flows according to the stand$-$alone principle.

Management$$s discretion to set the firm$$s capital structure is applicable at the firm level. Management is only authorized to issue debt to fund its projects and not sell equity that alters its capital structure. As a result, the financing costs are relevant in the analysis of a project$$s incremental cash flows according to the stand$-$alone principle.