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Hi john sir
John sir ..
Q.1why interest on capital is treated as irrelevant cost if it is not notional cost?Q.2 why is the difference between cost of capital, target rate of return and Roce..
My view is cost of capital is finance cost which we are supposed to pay…target rate of return and roce are smae thing..this is the rate of profit which we require..am i right?
1. I don’t know in what context you are asking this. If you are referring to investment appraisal questions and calculating the NPV, then we always ignore interest payments because they are taken into account in the discounting. The whole reason for discounting is to account for the interest.
2. The cost of capital is the rate of interest that is being paid on money. Return on capital employed is not a rate of interest but is a measure of profitability. A target return on capital is the rate that they are wanting to achieve.
Have you watched our free lectures? If not, then I do suggest that you do watch them.
Our free lectures are a complete course for Paper F2 and cover everything needed to be able to pass the exam well.Hmm..thanks sir..got it..yeah i have watched bt somehow i missed the point..yeah i was refering interest payments to npv calculation..thanks
One more question im context of relevant costing..when chosing a project why we ignore interest payments even it is not notional?
Relevant costing is only in the syllabus for F2 in the context of investment appraisal (and I have answered for that one).
I am therefore not really sure what you are asking about 🙂
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