What is ‘Implicit Rental Rate’
The opportunity costs that a firm incurs as a result of using their own assets for ongoing operations instead of other alternative uses. The implicit rental rate can be either greater than or less than the firm’s cost of capital.
Explaining ‘Implicit Rental Rate’
In the event that the implicit rental rate is lower than the firm’s cost of capital, then the firm is not likely to be in business for very long. This is because the firm’s cost to operate its assets, as measured by its cost of capital, is greater than the firm’s best alternative use for those assets.
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