Opportunity Cost of Assets
Implicit costs result when a person or business uses an available asset rather than rent or sell such assets. One example of implicit cost is a business firm owning a building and using the same for its operations. The implicit cost is the rent the building would attract if leased out to another firm.
The viability of using the building for the firms business depends on the net returns generated from the operations from the building less the implicit costs of renting out the same building. If the result is negative, the business operations from the building is unviable even if it generates positive cash flows and the accounts show a profit, or indicate that the asset is underutilized.
To illustrate, assume the net profit of the business is $10000 per month and the possible rent that the building can earn is $7000, the actual or economic profits from operations is $10000 - $7000 (notional rent that the firm would get even if it does not carry out any operations) = $3000. If the rent that the building can earn is $12000 and the profits out of business operations are $10000, actual loss is $10000- $12000 = $ -2000, meaning that the asset is underutilized and that carrying out the business from the premises does not make business sense.
In a similar way, assuming $100000 invested in a business fetches a return of $5000 annually, and the bank interest is 10 percent, the business even when making profit is unviable. This is because the implicit cost of $10000 (10 percent interest for $100000) is more than the returns from the investment.
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