Capital costs are the costs required to purchase raw material or inventory items along with financing fees, loan maintenance fees, and interest. They refer to the money that is invested in your inventory.
The capital costs are generally different based on the industry you are in. For example, service industries and manufacturing industries vary significantly with regards to operations expenses as different opportunities are available to invest in. When making decisions about capital costs and your investments it is important to consider what opportunities there are. This is an opportunity cost analysis. Opportunity costs come into play because when looking at capital costs, you must consider what the return on your capital could have been if it was used for something other than inventory. Opportunity costs are also something very familiar to investors. When answering the question, why do investors need to consider opportunity costs when working with capital, the answer is quite simple. Investors must consider the rate of return they will receive from the opportunity so that they have some understanding of how they will continue to supply capital to an organization.
Subscribe below and receive lean, six sigma, operations, supply chain, logistics, distribution and business terms in your mailbox.
CLICK HERE TO SUBSCRIBE