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Imputed costs are the opportunity costs that the firm gives up when using its resources. It does not have effect on cash flow
Imputed cost is a cost that is incurred by virtue of using an asset instead of investing it or undertaking an alternative course of action. An imputed cost is an invisible cost that is not incurred directly, as opposed to an explicit cost, which is incurred directly. Imputed cost is also known as "implied cost" or "opportunity cost".
It is a concept based on an economic theory, which basically states that to obtain anything one must give up something in return.
E.g. to get a full-time four year college education, one may need to forgo the opportunity of working full time and earning $20,000 per year in that period. The $20,000 is the imputed cost. Among other concepts, the imputed cost concept is essential when computing economic profit. This is calculated by taking the net accounting profit or loss and deducting the imputed/opportunity cost.
The cost of capital is a term used to refer to the cost of a company's funds (both debt and equity) or from an investor's point of view "the shareholder's required return on a portfolio company's existing securities(shares)". It is used to evaluate new projects of a company as it is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet.
In essence Cost of Capital is (cost of funds) cost of equity funds & debts funds & inorder to accept a new project the Net present value of the project needs to be greater than Cost of Capital.
Imputed cost of capital or opportunity cost is the benefit foregone by investing the money in business. For eg if the risk free rate of return of a govt bond is5 %, then5% is the imputed cost of capital. Cost of capital is the expectaion of ht e shareholders or owner from the company. It is usually calculat.ed for a joint stock form of ownership. It is the sum of cost of debenture & cost of equity. Cost of debenture is the after tax interest rate. Cost of equity is the dividend rate.
