Question

A firm withdraws Rs. 10,000 from its fixed deposits with the bank and uses the money for the purchase of factory equipment. Find the cost of this investment.

Answer 1

Withdrawal of funds from the fixed deposits/term deposits for the purchase of a factory equipment/ generation set involves an element of explicit cost equal to the price of factory equipment/generation set paid by the industrialist. It also involves an element of implicit cost equal to the loss of interest on the funds withdrawn from the bank.
Cost of investment $=$ Opportunity cost of investment

$=$ Explicit Cost $+$ Implicit Cost

$\downarrow$ $\downarrow$

Expenditure of Rs. 10,000 $+$ Interest amount that

for the purchase of Rs. 10,000 would have

factory equipment / earned if kept in the

generation set bank