The Key Difference Between Cost of Capital and Capital Cost

Cost of Capital vs Capital Cost
Feature	Cost of Capital	Capital Cost
Definition	The required return a company must earn on its investments to maintain its market value and attract funding.	The actual expenditure incurred to acquire or build a capital asset like machinery, property, or infrastructure.
Nature	Financial concept used for investment evaluation.	Accounting concept reflecting the actual amount spent.
Type	Percentage rate (e.g., 10%) used for discounting cash flows.	Monetary value (e.g., ₹50 lakhs for machinery).
Purpose	Helps in evaluating investment returns and decisions (used in NPV, IRR).	Helps in budgeting and capital expenditure planning.
Used In	Corporate finance, investment appraisal, valuation.	Accounting, asset valuation, financial reporting.
Calculation Basis	Weighted Average Cost of Capital (WACC), combining cost of debt and equity.	Invoice value or purchase price plus installation, taxes, and other costs.
Example	If WACC is 9%, a project must earn more than 9% to be viable.	If a company buys a plant for ₹10 crore, that’s the capital cost.
Focus Area	Return expected by investors and lenders.	Cash outflow required to acquire a long-term asset.
Time Frame	Ongoing cost associated with raising capital.	One-time cost incurred at the time of acquisition.
Influencing Factors	Market interest rates, risk profile, capital structure, investor expectations.	Market price of assets, import duties, setup charges, and taxes.
Accounting Treatment	Used as a benchmark in financial analysis; not recorded directly in accounts.	Capitalized as a fixed asset and depreciated over time.
Relevance to Decision-Making	Determines hurdle rate for investments.	Determines the amount needed for capital budgeting.
Risk Consideration	Includes premium for risk (especially equity).	Generally based on actual expenditure, risk considered during planning phase.
Used By	Investors, financial analysts, CFOs.	Accountants, finance managers, auditors.
Impact on Valuation	Higher cost of capital reduces firm valuation (discount rate in DCF).	Higher capital cost affects profitability and ROI.
Formula Example	WACC = (E/V × Re) + (D/V × Rd × (1 – Tc))	No formula; it’s the sum of all actual capital expenditures.
Common Confusion	Often confused with capital cost due to terminology.	Sometimes misunderstood as the same as cost of capital.
Summary	The rate of return needed to justify investment.	The price paid for acquiring long-term assets.