Question

Interest rates, the cost of money, influence most all factors related to personal and corporate capital budgeting. The more obvious personal information for the cost of money is the rates associated with a mortgage or car loan. As a CFO you would “shop” interest rates to find the best rate for your financing needs.

• Would you, as the CFO, finance your projects as soon as possible if the cost of capital was expected to drop? Please explain.
• More importantly, where do you find the information to analyze expected changes in interest rates?

Answer 1

Answer: Yes, if there was a chance that my projects finances were about to drop or in the process of dropping, I would finance my project ASAP. I would want to be in a fixed into (or locked into) a low rate to insure that I stop my project finances from depleting altogether due to high interest rates. No one wants to be stuck with high interest rates that will eat you up in the end. Sometimes the interest rates alone can be more than the original financial project cost.
Answer: If I were to analyze the expected change in interest rates I would use after-tax free cash flow (FCF). The FCF equals the change in the firms cash income, excluding interest expense, that the project is responsible for, plus depreciation and amortization for the project, minus all required capital expenditures and investments in working capital . FCF also equals the incremental after-tax cash flow from operations minus the net capital expenditures and investments in working capital required for the project .
This solution is provided with detailed explanation. Please discuss in case of Doubt.
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