The calculation of capital costs for a small consignment of produce is far too complex an operation when the aim of the exercise is simply to work out marketing costs of vegetables from a group of farmers to a nearby urban market. As noted in other chapters it is best to use commercial rates for the hire of services, such as transport rates, storage rates or contract milling charges, even if the trader is using his own vehicle or other facilities. These commercial rates will already have capital costs built in by the trucker, warehouse owner, or others. However, extension workers may be asked to advise a Cooperative on whether to build a store, construct a maize mill or purchase a truck. Under these circumstances it is necessary to compare the capital and depreciation costs with the expected annual return from the Cooperative's activities after the direct operating costs have been covered.
Capital costs are the interest paid to the bank on the loan.
An alternative, and more accurate approach, is to assume depreciation at a fixed percentage per year. In this way the value goes down more rapidly in the early years than later. Even if depreciation is taken into account, a calculation could still give a misleading impression of an organization's profitability. This is particularly the case in countries with high inflation levels. If an asset is depreciated on the basis of its purchase price this will underestimate the funds needed to replace the asset when it can no longer be used.