Interest Cost

See: Interest; See: WACC.

The cost of interest is basically the cost of renting cash. A given apartment could be converted into a condo, albeit a crappy one, and sold for $100,000. But that apartment rents for 600 bucks a month. To the landlord, there are costs of $100 a month for power, janitor, insurance, gardening stuff, and the guy in the weight room who always seems to be asleep and buff.

So, net to the landlord, she gets $500 a month in rent contributed to her profit pool; that's 6 grand a year on an "opportunity costed investment" of 100 grand. She is effectively "yielding" 6% on her "investment" of the 100 grand. She could just as easily sell the apartment as a condo and pocket 100, but she chooses to rent it.

And yes, we're ignoring tons of stuff here, like real estate appreciation, taxes, conversion fees, etc. The gist is that money is like any other asset in this sense: it can be rented (or leased)...for a price. That price is the interest cost. Which, for most businesses running a profit and paying taxes, is happily tax-deductible, just like any other cost of running the business, including the sleeping Arnold at the desk in the gym.