4

I think the textbooks are suggesting that most capital budgeting doesn't explicitly include the mechanism of financing for a specific project. Instead, the planners would use some overall average corporate cost of capital, and the details of actually coming up with the money are left to the Treasurer. In these cases, financing costs are part of the hurdle ...


2

If you want to discount the CF3 from 3 years in the future to today you should use (1 + 3yr spot rate)^3. There's no reason to use forward rates for that purpose. The forward rates should only be used for period-by-period discounting - for example, if you wanted to find the value after 3 years of a CF4 which occurs after 4 years, you would use (1+ 1yr ...


1

I think the fundamental misunderstanding you have is that you think that Cash Flows from Financing Activities includes interest payments. It does not. In only includes principal repayments. Cash Flows from Operating Activities does include interest payments. Look at any Income Statement + Cash Flow Statement on any 10-K from sec.gov and you'll see this to be ...


1

The interest payment in incorporated in the "cost of capital" or discount factor part of the NPV equation. In other words, If you had to borrow money at 8%, then the net present value is calculated by discounting the cash flows by your borrowing costs. So if you count the interest payments, you'll be "double-counting" the borrowing costs. Put another way, ...


1

If, by cost of capital, you mean the marginal cost then there is only one specific case where you can ignore it. That is the case where the decision makers do not feel a need to be profit maximizing. There are a couple of real-world, splendid examples of this. Rupert Murdoch and Donald Trump could be thought of as utility maximizers rather than profit ...


1

If your issue is the holding period "sensibility", I don't have persuasive economic/fundamental motivation about it. It's an interesting question. Anyway in econometric point of view the issue is part of instability parameters problem. If the time horizon for your investment project is, for example, one year, then you need return and beta one year based. ...


1

This is all theoretical and real life will diverge from the theory The spot rates and forward rates are linked. Spot rate for the nth period should equal the product of all the forward rates up to that period. i.e Let Spot{n} = spot rate for nth period Let Forw{k,j} = forward rate to period j at period k Let X_m be the m'th period. Then (1+Spot{n})^n =...


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