As a summer intern, you are asked to prepare a spreadsheet calculating the project free cash flow associated with a project your employer is considering. Initially your boss assumes that no debt will be used to fund the project. During your presentation to the committee that evaluates projects, you learn that, in fact, the project will be financed with 25% debt. Determine whether the following statements are true or false, and explain your answer:
a. You need to go back to your office and adjust the project’s free cash flows to include the interest on the debt.
b. You need to go back to your office and adjust the project cash flows to update the taxes paid due to the tax shield provided by taking on debt.
c. Your cash flow model does not need to be updated because the financing of the project does not affect the free cash flow calculation.

  • CreatedNovember 13, 2015
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