When conducting a capital budget analysis, all incremental cash flows relating to the proposal are included in the analysis. DMac Barny Ltd has an asset base of $400 million and a capital structure of 50% Debt and 50% Equity. The company plans to maintain this structure with any new investments. The company has a target  weighted average cost of capital of 12%.

You have been tasked with reviewing a major capital budget analysis prepared by DMac Barny's CFO Dianne McGrath which uses 12% as the required rate of return. You are aware that the project requires additional capital of $200 million; which under the target capital structure will require an additional $100 million of debt  to be raised. You are aware that at present DMac Barny Ltd can raise debt funds at a cost of 5% which will require meeting additional interest costs of $5 million per annum. In reviewing the analysis prepared by Ms McGrath you can see that these significant cash flows associated with these additional (incremental) interest payments have been included.

Q. Provide a thorough and critical analysis explaining why Ms McGrath should, or should not, include the payments on interest for the borrowings for the new project in her capital budget.

Answer rating: 100% (QA)

Ms McGrath should include the payments on interest for the borrowings for the new project in her capital budget Heres a thorough analysis explaining w... View the full answer