Question
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
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?
Do not include cash flows on the loan as they are included in the cost of capital
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
Include interest cash flows in times 1 to 5 and repayment of loan principal at time 5.
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