Explain the implicit cost of capital, Financial Management

Explain the Implicit cost of capital

Implicit cost of capital can be defined as the rate of return associated with the best investment opportunity for the firm and its Shareholders which will be foregone if project presently under consideration by the firm were accepted. In this connection it can be mentioned that explicit costs arise when firm raises funds for financing the project. It's in this sense that retained earnings has implicit cost. Other forms of capital also have implicit costs once they are invested, so in a sense, explicit costs can also be viewed as opportunity costs. This implies that a project must be rejected if it has a negative present value when its cash flows are discounted by the explicit cost of capital.

 

Posted Date: 9/4/2013 5:54:53 AM | Location : United States







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