Interest as a cost

For income-tax calculations, interest on owned money cannot be charged as a cost. In design calculations, however, interest can be included as a cost unless there is assurance that the total capital investment will be supplied from the company s funds and the company policies permit exclusion of interest as a cost... 

A major source of new capital is from internal capital, including, primarily, undistributed profits and depreciation funds. Since this definitely is owned capital, it is not necessary to consider interest as a cost. However, some concerns prefer to assign a cost to this type of capital, particularly if comparisons of alternative investments are to be made. The reasoning here is that the owned capital could be loaned out or put into other ventures to give a definite return. 

Because of the different methods used for treating interest as a cost, a definite statement should be made concerning the particular method employed in any given economic analysis. Interest costs become especially important when making comparisons among alternative investments. These comparisons, as well as the overall cost picture, are simplified if the role of interest in the economic analysis is clearly defined. 

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See also in sourсe #XX -- [ , ]

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