Explicit implicit cost marginal cost of capital average cost of capital historic cost/book cost future cost spot cost are not affected by investing in new inves

Priya sarda

The explicit cost of any sources of capital may be defined as the discount rate that equates the present value of the cash inflows that are incremental to the taking of the financing opportunity with the present value of its incremental cash outflows. When a firm raises funds from different sources, it involves a series of cash flows. The implicit cost is the income which the shareholders could have earned if such earnings would have been distributed and invested by them. Therefore, explicit cost will arise only when funds are raised whereas implicit cost will arise when they are used. Future Costs are the expected costs of funds for financing a particular project. They are very significant while making financial decisions. For instance, at the time of taking financial decisions about the capital expenditure, a comparison is to be made between the expected IRR and the expected cost of funds for financing the same, i.e., the relevant costs here are future costs. Historical costs are those costs which have already been incurred in order to finance a particular project. They are useful while projecting future costs. In short, historical costs are very important by the amount they keep in predicting the future costs. Because, they supply an evaluation of performance in comparison with standard and/or predetermined costs. Specific Cost The cost of each component of capital, viz., equity shares, preference shares, debentures, loans etc., is termed as specific or component cost of capital which is the most appealing concept. While determining the average cost of capital, it requires consideration about the cost of specific methods for financing the projects. This is particularly useful where the profitability of the project is evaluated on the basis of the specific source of funds taken for financing the said project. For instance, if the estimated cost of equity capital of a firm becomes 12%, that project which are financed by the equity shareholders’ fund, will be accepted provided the same will yield at least a return of 12%. The average cost of capital is the weighted average cost of each component of funds invested by the firm for a particular project, i.e., percentage or proportionate cost of each element in total investment. The weights are in proportion of the shares of each component of capital in the total capital structure or investment. Marginal Cost: According to the Terminology of Cost Accountancy, Marginal Cost is the amount at any given volume of output by which aggregate costs are .hanged if the volume of output is increased or decreased by one unit. Same principle is being followed in cost of capital. That is, marginal cost of capital may be defined as the cost of obtaining another rupee of new capital. Generally, a firm raises a certain amount of fund for fixed capital investment. But marginal cost of capital revels the cost of additional amount of capital which is raised by a firm for current and/ or fixed capital investment. What is Spot Price. The spot price is the current price in the marketplace at which a given asset—such as a security, commodity, or currency—can be bought or sold for immediate delivery.