Define the term- future cost and historical cost, Financial Management

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Define the term- Future Cost and Historical Cost

Future cost of capital refers to expected cost of funds to be raised to finance a project. In contrast, historical cost signifies cost incurred in the past in acquiring funds. In financial decisions future cost of capital is comparatively more significant andrelevant. When evaluating viability of a project, finance manager compares expected earnings from project with expected cost of funds to finance the project. Similarly, in taking financing decisions, attempt of the finance manager is to minimise future cost of capital and not the costs already defrayed. This doesn't imply that historical cost isn't relevant at all. As a matter of fact, it can serve as a guideline in predicting future costs and in evaluating past performance of company.

 


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