Capital borrowers

A man wishes to borrow 2,400 so he can buy a new car. He can get a bank loan for which he would be required to pay 7% interest on the initial loan. The payments would be in equal monthly installments over a period of one year. He could also get a loan from the credit union where he works. The terms are that each month he would pay 200 to reduce the capital borrowed and 1% interest on the unpaid balance. What is the total interest paid for each loan ... 

The conclusion drawn by Foley is that new borrowing is required to meet this shortfall. There is a paradox of borrowing, the borrowing requirement contrasting with the received opinion in Marxist circles that all investment is drawn from an existing pool surplus value.1 With B(t) defined as new capital borrowing (ibid. 89), capital outlays under expanded reproduction are met by setting... 

The project is financed by capital borrowed at 25% annual interest. The initial principal borrowed corresponds to the maximum calculated capital-cost estimation of A 13.5 milhon. Five equal repayments of AS5.02 million are required. 

A 200 tonne/day contact sulfuric acid plant burning elemental sulfur costs 1.5 million to build. melter by-product sulfur dioxide is available as an alternate feed at no raw material cost, but for the same capacity requires a total investment of 3.75 million to utilize this feed. Assuming continuous operation, what would the breakeven price for sulfur have to be to make the utilization of smelter sulfur dioxide attractive if the company has to pay 10% interest on capital borrowed to build either plant Use estimates based on the first year of operation only. Assume the same labor costs. 

The time value of money is the central concept in this traditional approach. Resources invested now are worth more than the same amounts gained later. This is due to the costs of the investment capital that must be paid, or foregone, while waiting for subsequent returns on the investment. The time value of money is represented by discounting the cash flows produced by the investment to reflect the interest that would, in effect at least, have to be paid on the capital borrowed to finance the investment (Rouse and Boff 1999, 225). 

Major financing challenges can be foreseen when attempting to create a battery plant supply business. Because the strategy to hold capital cost down is to rely on economy of mass production, a potential supplier must invest in a large-throughput factory, and the risk premium on capital borrowed to build the factory will be high absent a full order book to show to the bankers. But customers want to see both a fully licensed prototype and an evident... 

The cost of the capital depends on its source. The source of the capital often will not be known during the early stages of a project, and yet there is a need to select between process options and carry out preliminary optimization on the basis of both capital and operating costs. This is difficult to do unless both capital and operating costs can be expressed on a common basis. Capital costs can be expressed on an annual basis if it is assumed that the capital has been borrowed over a fixed period (usually 5 to 10 years) at a fixed rate of interest, in which case the capital costs can be annualized according to... 

As stated previously, the source of capital is often not known, and hence it is not known whether or not Eq. (A. 10) is appropiiate to represent the cost of capital. Equation (A. 10) is, strictly speaking, only appropriate if the money for capital expenditure is to be borrowed over a fixed period at a fixed rate of interest. Moreover, if Eq. (A. 10) is accepted, then the number of years over which the capital is to be annualized is unknown, as is the rate of interest. However, the most important thing is that even if the source of capital is not known, etc., and uncertain assumptions are necessary, Eq. (A. 10) provides a common basis for the comparison of competing projects. 

In the above example, the discount rate used was the annual compound interest rate offered by the bank. In business investment opportunities the appropriate discount rate is the cost of capital to the company. This may be calculated in different ways, but should always reflect how much it costs the oil company to borrow the money which it uses to invest in its projects. This may be a weighted average of the cost of the share capital and loan capital of a company. 

If money is borrowed, interest must be paid over the time period if money is loaned out, interest income is expected to accumulate. In other words, there is a time value associated with the money. Before money flows from different years can be combined, a compound interest factor must be employed to translate all of the flows to a common present time. The present is arbitrarily assumed often it is either the beginning of the venture or start of production. If future flows are translated backward toward the present, the discount factor is of the form (1 + i) , where i is the annual discount rate in decimal form (10% = 0.10) and n is the number of years involved in the translation. If past flows are translated in a forward direction, a factor of the same form is used, except that the exponent is positive. Discounting of the cash flows gives equivalent flows at a common time point and provides for the cost of capital. 

A (DCFRR) of, say, 15 percent imphes that 15 percent per year will be earned on the investment, in addition to which the project generates sufficient money to repay the original investment plus any interest payable on borrowed capital plus all taxes and expenses. 

The same money invested in a project with a (DCFRR) of 10 percent would, by Eq. (9-108), obtain an entrepreneurial return i = 8.37 percent on the whole investment, i.e., 8.37/ 100. Investment of the entrepreneur s own money would only achieve an aftertax return of (0.1)(1 — 0.40) = 6 percent on 50, or 3/ 100 of total investment. The incentive to the entrepreneur to manage the projeci thus corresponds to a tax-free income of 5.37/ 100 of total investment. In practice, money is borrowed from more than one source at different interest rates and at different tax liabihties. The effective cost of capital in such cases can be obtained by an extension of the above reasoning and is treated in detail by A. J. Merrett and A. Sykes Capital Budgeting and Company Finance, Longmans, London, 1966, pp. 30 8). 

Equation (9-245) shows that in this particular case the fixed-capital cost per unit of input energy CpJW) must not exceed 160,000 (GJh" )" or 576 per kilowatt, to have a 1-year payback period if the heat pump is operational for 8000 h/year. For this case the corresponding value of y is about 0.12 for a heat pump with an operating life of 10 years purchased with money borrowed at a 10 percent rate of interest. 

The selection of the discount factor depends on the financial policy of the business, but is usually 2-3 per cent above the current interest rates. Use of discounting methods will determine whether the project cost will produce a better return than by simply investing the capital involved at the highest compound interest rate or, if the capital cost has to be borrowed, whether the rate of return is much higher than the cost of borrowing. 

Gearing - the ratio of fixed rate capital and borrowings to other capital, that is ... 

The total of capital and reserves is the amount by which the assets can fall below the balance sheet value without depleting the amount available for creditors. A high ratio will reduce borrowing capacity. 

For corporations the same reasoning applies. To offer the prime interest rate the lender must be sure he can get his capital back plus interest. This means that the borrower s total assets must be considerably greater than the current liabilities and debts. Consider the simplified balance sheet given in Table 10-13. By current assets is meant cash and everything involved in working capital-feedstocks, unsold product, plus all the product that has been shipped but for which no payment has... 

Stage 1 At the outset firms in the capital goods sector (sector 1) begin to borrow money from banks in order to finance the wage bill of that sector.5 Out of these wages, workers in sector 1 purchase consumption goods from sector 2. 

Borrowing in period t is used to supplement the money hoard inherited from sales in period t - 1. At the end of period t, capital outlays lead to expanded sales, which enhance the size of the money hoard. Under expanded reproduction, capital outlays are met from a growing hoard of money that is replenished by a combination of borrowing and sales. 

It can be pointed out that Foley implicitly embraces a single swap approach to the circuit of money. He assumes that capitalists must advance as money capital the total value of output, which once sold earns the precise amount of revenue required to recover the outlay. This is seen most clearly in equation (5.1), where the money capital advance is equal to the total sales of all capital and consumption goods. In Chapter 4 we saw that this approach, associated with Seccareccia (1996), has been heavily criticized by Nell (2004) for overestimating the amount of money required to oil the circuit of money - a serious miscalculation since it is important to know the precise borrowing requirements placed on the financial system. 

In (5.5) borrowing is used to finance all money capital outlays on capitalist consumption (u) and new constant and variable capital (dC + dV) in (5.6) this outlay has a multiplier effect (in proportion m) on total sales. As a consequence, the money circuit is viable without the requirement of a money hoard, accumulated from the previous period s sales. 

In chapter 9 of Capital, volume 3, Marx developed a procedure for the Transformation of Commodity Values into Prices of Production (Marx 1981 254). Instead of using Marx s rather complex example of five branches of production, in which fixed capital is employed, we shall explain his procedure using a simplified example for three sectors, borrowed from Howard and King (1985 99). In this example, all capital is assumed to be of the circulating type, and simple reproduction is assumed, so that there is no expansion of capital over time. 

Second, Domar shows that there is a paradox of borrowing in expanded reproduction (an insight later provided by Foley). Capitalists cannot borrow from an existing money hoard in order to expand capital accumulation they must borrow from financial institutions. This places financial fragility at the heart of the reproduction schema, since all capital accumulation is associated with borrowing and hence, all borrowing is potentially undermined by the problem of demand. This contrasts with Marx s identification of financial instability with occasions when capital accumulation overstretches itself. 

The paradox of borrowing also has some resonance with this statement by Marx (1981 640) The final illusion of the capitalist system, that capital is the offspring of a person s own work and savings, is thereby demolished. ... 

Laboratories, like any other investment, require a certain amount of capital to start and operate. Spend the necessary cash to buy the proper equipment to do the procedures required. Faulty equipment (not to mention insufficient knowledge) can cause fires, explosions, asphyxiation, and many other hazards. You can have one hell of a nice laboratory for the price of a funeral these days. Also hospitals are in excess of 150 a day if you are not in intensive care or requiring special services. 150 a day can operate even the most elaborate of laboratories. Therefore, if you have to beg, borrow, or steal to obtain a functional laboratory, then do so. Is three to five thousand dollars too much to spend on a lab that can easily produce a quarter of a million dollars worth of THC every week It takes money to make money, but very few, if any, investments can pay off as well as an underground laboratory run by competent chemists. 

Other capital items (interest on borrowed funds prior to start-up ... 

Other Capital Items Paid-up royalties and licenses are considered part of the capital investment since these are replacements for capitd to perform process research and development. The initial catalyst and chemical charge, especially for noble metal catalysts and/or in electrolytic processes, is a large amount. These materials are considered to have a hfe of 1 year. If funds must be borrowed for a new facility, then the interest on borrowed funds during the construction period is capitalized otherwise, the interest is part of the operating expense. 

Cost of capital The cost of borrowing money from all sources, namely, loans, bonds, and preferred and common stock. It is expressed as an interest rate. 

External funds Capital obtained by selling stocks or bonds or by borrowing. 

The cost of capital is what it costs a company to borrow money from all sources, such as loans, bonds, and preferred and common stock. It is an important consideration in determining a company s minimum acceptable rate of return on an investment. A company must make more than the cost of capital to pay its debts and make a profit. From profits, a company pays dividends to the stockholders. If a company ignores the cost of capital to increase dividends to the stockholders, then management is not meeting its obligations to pay off outstanding debts. 

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