If it is ongoing during the project then it is a cash outflow. This is because the WACC already incorporates the cost of these funds and to include them in the cash flow analysis would amount to double counting. There is an opportunity cost here. In going over the figures, you notice that no mention has been made of inflation. Because of the competitive nature of the sector, sales prices will only rise by the general rate of inflation.
Inflation poses a problem in cash flow analysis.
In general how is it dealt with, and in this example describe how you would conduct the analysis to deal with inflation. 5 marks Consistency is crucial in the treatment of inflation. Either estimate the cash flows in money terms and use a money discount rate, or estimate the cash flows in real terms and use a real discount rate. Mixing real with nominal may lead to incorrect decisions being made. The manager is still unsure of the NPV technique, he says that he would be comfortable using the IRR technique.