Question

apple has a higher cost of debt than most companies in the coffee business. Which of the following is true?

	A.	The business case needs to be adjusted for the cost of capital.
	B.	The business case is evaluated using NPV or IRR which already considers the cost of capital in the calculation or evaluation so no adjustment needed..
	C.	The cost of debt is not relevant to business cases.
	D.	The cost of debt is considered a flotation cost.

Answer 1

Option (B) : The business case is evaluated using NPV or IRR which already considers the cost of capital in the calculation or evaluation so no adjustment needed.

Explanation:

~ A business case basically refers to the analysis of a new project based on certain factors which includes its investments, feasibility tests, cashflows patterns, risk involved, scope and areas to explore, etc.

~ the business cases often incudes a capital budgeting tools evaluation which includes NPV and IRR.

~ While using such capital budgeting tools, the prospective inflows from the project are discounted at the respective cost of capital of that project/business.

~ Hence, if a business as a higher cost of capital, the capital budgeting tool will automatically inculcate its effect into the evaluation as the project with higher cost of capital will tend to generate a lower discounted value of inflows and vice-versa.