Money Cost of Capital vs Cost of Capital

This is the difference between money cost of capital and cost of capital

That is why you need to get Money cost of capital rate minus Tax then only you will get cost of capital. This situation also applicable to interest rate or borrowing rate, but the meaning are not the same.

Usually Profit/Loss accounts are MONEY rate not REAL rate.

Money cost of capital is the amount of money rather than the proportional rate (cost of capital). Cost of capital is not REAL rate.

So the question from Revision class is Money Cost Of Capital, if we multiply with it we will get the REAL cash flows instead of discounted cash flows....see formulae below you will know what I mean.

FORMULAE to get REAL or MONEY rate :
1 + r = (1 + h)(1 + i)

Good Luck! If you have any question please post at the comment =)

(Source : Wikipedia)

Additional Reference
Google Book

Do you like this blog? Then Subscribe to "TARC-AFA" NOW!

1 comment:

Anonymous said...

hello, if the money cost of capital is 17% and general inflation is 8%, then does that mean that the real cost of capital is 8%?

if so, how would we work out the NPV using the real cash flows as we'd be dividing the cash flows by 1.08 twice - once as we have to divide the money cash flow by the general inflation rate (1.08) and then again to get the NPV