NPV/IRR with bank loans

Cheech22 · #1 (**permalink**) 08-09-2010, 06:51 PM

Greetings all, I got a quick question about discount rates.

When companies do NPV calculations, do they work the debt service into their cash flows, or is all that included as part of the discount rate? Meaning, if I'm a firm and making a purchase, would I look at my debt service as cash outflows, or would I just use a higher discount rate that would include the loan interest?

Helper55 · #2 (**permalink**) 08-15-2010, 06:55 AM

Things like debt cash flows, risk from debt etc is worked into the discount rate (wacc, cost of capital, irr etc) so when you calculate NPV, you use that single discount rate for the cash flows of the project/investment.

Alex Richards · #3 (**permalink**) 08-16-2010, 06:07 AM

Yes, I think Helper55 is correct.

Cheech22 · #4 (**permalink**) 08-18-2010, 07:31 PM

Thank you folks. That is what I figured as well, although in some real estate scenarios I've seen guys factor debt service directly into the analysis (probably since the money is coming mainly from one source- a mortgage.)

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