When performing a capital budgeting analysis, interest expense included in the cash flows should be based on the current interest cost and not the historical cost of interest. Comment.
I would think that when preparing a budget historical trends should be considered.
This is MY opinion or comment, not based on actual knowledge of this particular subject.
When performing a capital budgeting analysis, it is important to consider the interest expense correctly in order to make accurate financial decisions. In this case, the interest expense should be based on the current interest cost and not the historical cost of interest.
The reason behind this is that the cash flows in capital budgeting represent the future inflows and outflows of cash that are relevant for evaluating an investment decision. Since the interest expense is a future outflow of cash, it should reflect the current and prevailing interest rates.
Using historical interest costs would not be appropriate because they may not accurately reflect the present market conditions. Interest rates can fluctuate significantly over time, and basing the analysis on historical interest rates could lead to misleading or inaccurate results.
To determine the current interest cost, you can consider the prevailing interest rates in the market. These rates can be obtained from various sources such as financial news websites, central bank publications, or interest rate tables provided by financial institutions.
By using the current interest cost in your capital budgeting analysis, you can ensure that the cash flows are based on the most accurate and up-to-date information available. This will help in making informed decisions regarding investments and assessing the profitability and feasibility of various projects or investments.