Explicit and Implicit Cost:
The cost of capital may be explicit or implicit cost on the basis of the computation of cost of capital.
Explicit cost is the rate that the firm pays to procure financing. This may be calculated with the help of the following equation;
CIo = n∑(T-1) COt / (t + C)t
Where,
CIo = initial cash inflow
C = outflow in the period concerned
N = duration for which the funds are provided
T = tax rate
Implicit cost is the rate of return associated with the best investment opportunity for the firm and its shareholders that will be forgone if the projects presently under consideration by the firm were accepted.
The cost of capital may be explicit or implicit cost on the basis of the computation of cost of capital.
Explicit cost is the rate that the firm pays to procure financing. This may be calculated with the help of the following equation;
CIo = n∑(T-1) COt / (t + C)t
[Post Image Courtesy of DDPavumba at FreeDigitalPhotos.net]
Where,
CIo = initial cash inflow
C = outflow in the period concerned
N = duration for which the funds are provided
T = tax rate
Implicit cost is the rate of return associated with the best investment opportunity for the firm and its shareholders that will be forgone if the projects presently under consideration by the firm were accepted.
Explicit and Implicit Cost
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Wednesday, April 19, 2017
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