Question

Would you consider an interest payment on a loan to a firm an explicit or implicit cost?

Short answer

An interest payment on a loan to a firm is an explicit cost.

Step-by-step solution

Step 1. Explicit and implicit costs

Explicit costs represent real expenses of a business that are recorded in absolute monetary terms and considered as a part of costs of production.

Implicit costs are actually the opportunity costs of production that a company always keeps in mind for taking important moves in its business operations. Implicit costs are not considered in accounting terms.

Step 2. An 'Explicit' or 'Implicit' cost of a loan to a company is the interest payment.

An interest payment on a loan to a firm must be considered as an explicit cost since it is an out-of-pocket cost for the firm and the firm will consider the interest payment in accounting terms and include it into its financial statement.