Information > Financial Terms > This page Imputed and Implicit Costs Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel (We recommend this as work of authority.) Expenditures that are attributable to the use of one's own factor of production, such as the use of one's own capital, are imputed costs.  In accounting, imputed costs are often ignored when recording transactions. Interest imputation is the process that estimates the interest rate to be used in finding the cash price of an asset.  An imputed interest rate is similar to an implicit interest rate in that it equates the present value of payments on a note with the face of the note, but it can also be established by factors not associated with the note transaction or underlying contract.  The imputed rate approximates a negotiated rate (a fair market interest rate) between independent borrowers and lenders.  The imputed rate takes into consideration the term of the note, the credit standing of the issuer, collateral, and other factors.  For example, an investor is considering the purchase of a large tract of udeveloped land.  The offering price is \$450,000 in the form of a non-interest-bearing note that is to be paid in three yearly instalments of \$150,000.  There is no market for the note or the property.  When the investor considered the current price rate, his credit standing, the collateral, other terms of the note, and rates available for similar borrowings, a 12% interest rate is imputed. Implicit interest is interest implied in a contract.  It is neither paid nor received.  The implicit interest rate equates the present value of payments on a note with the face of the note.  The implicit rate is determined by factors directly related to the note transaction.  For example, assume that a dealer offers to sell a machine for \$100,000 cash or \$16,275 per year for ten years.  By dividing the cash price by the annual payments  (an annuity), a factor of 6.144 is computed (\$100,000/\$16,275).  By referring to a present value of an annuity of 1 in Arrears table, 6.144 appears in the 10% interest column when ten payments are involved.  Therefore, the implicit interest rate in this offer is 10%. Back to Information