In the framework of chapter 4, this was just the interest rate the cost of. For example, a project requires an investment of rs. The expression on the righthand side of 6, the implicit rental price of capital, is commonly referred to as the user cost of capital. This pdf is a selection from an outofprint volume from the national bureau of economic research. Y since v is between 2 and 3 that is, the capital stock is 2 or 3 times. The pace and pattern of business investment in fixed capital are central to our understanding of economic activity. Note that when there are changes in the netoftax price of investment goods from changes in p, c, z, or itc, the user cost becomes rising investment good prices reduce the cost of capital, rising tax subsidies z, itc raise the cost of capital. In a perfect capital market, where all borrowers and lenders pay and receive a uniform interest rate, the explicit interest cost of loanfinanced investment equals the implicit forgoneinterest cost of selffinanced investment, so the cost is the same whether the firm finances through borrowing or internally. The cost of capital is the companys cost of using funds provided by creditors and shareholders. Bond yields are taken from moodys industry manual and municipal and. A companys cost of capital is the cost of its longterm sources of funds.
Measuring capital oecd manual second edition capital in particular of the physical sort plays several roles in economic life. The oxford hand book of the economics of the biophar. And the cost of each source reflects the risk of the assets the company invests in. Capital is invested, disinvested and it depreciates. I0 book value of investment in the beginning, in book value of investment at the end of n years. Cost of capital has different connotations in different economic philosophies.
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