Interest in Capital Budgeting

CFA Level II Corporate Finance
#1

Hi all,

I realize that interest expense shouldnt be included in the after tax cash flows for capital budgeting, but my question is why don’t you include the tax shield that you receive from the interest expense in the calculation. Wouldn’t it make sense to deduct the interest expense from EBIT, get your after-tax income based of EBT, then add back depreciation AND interest expense?

#2

I think the assumption is that the firm will have xyz interest expense no matter which project they choose to go forward with.

Also, remember one of the assumptions for capital budgeting is that financing cost is included in the discount rate/ required return