Question

1. Explain the components of the rental cost of capital.

Answer 1

There are different components of rental cost of capital they are as follows-

1. Real rate of interest- Real rate of interest affect the rental cost of capital to a very large extent. This type of interest accounts for the degree of inflation along with the nominal rate of interest.

2. Depreciation- the rate of depreciation also affect the rental cost of capital.the higher the depreciation and since tax deductible the rental cost of capital gors down.

3. Tax rate-tax rate are one of the major component of rental cost of capital because taxes are a direct expense on the property so so high the taxes rate higher the rented cost of capital. Taxation of capital tends to discourage investment by reducing the earning the firm received from its investment.

4.development rebate are also important in determination of rental cost of capital because higher the rebate lower the cost of capital.

So show these components of rental cost of capital must be effectively analysed in order to select the best possible alternative which will build the best possible return to the company.