Financing Costs Your book says that cost of financing a project are not relevant

Question

Financing Costs Your book says that cost of financing a project are not relevant cash flows for the purposes of evaluating whether a project is worth taking or not.

Objective Students are expected to argue in favor of positions they may not necessarily agree with, and in the process, learn to understand where opposing views come from. Such skills are necessary to stay away from "incestuous amplification" that arises from groups of people who think alike. You are required to oppose the claim that financing costs are not relevant.

Explanation / Answer

Financing cost are relevant cost as per my view. Without incurring this cost one cannot start a project, hence they are considered as relevant cash flows for purpose of evaluating the project

For example, A loan is taken to purchase machine. Now machine is necessary to start generating revenue. Thus loan can be consider as rellevant cash flow. Now if loan is taken than interest( financing cost) has to be paid. Now this cost occurs only because machine is purhcased, if machine was not purchased this cost wont have occured, Thus interest cost is relevant cash flow and shall be included in evaluating project.

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