Imputed interest charge
Imputed interest charge is the notional cost of capital tied up in a division: its investment base multiplied by the company's required rate of return, deducted from operating profit to find residual income.
See it move
Division Delta has €4,000,000 tied up in capital, and the company requires an 11% return on capital employed. The imputed interest charge is €4,000,000 times 11%, or €440,000 — notional, not a real payment. Deducted from Delta's €610,000 operating profit, it leaves residual income of €170,000.
The formula
Variables
- Imputed interest charge (€)
- Investment base (capital employed in the division) (€)
- Company's required rate of return on capital employed (decimal (%))
The notional cost of the capital tied up in a division, deducted from operating profit to arrive at residual income.
Check yourself
Division Comet has an investment base of €2,500,000. The company requires a return of 9% on capital employed. Division Comet's operating profit for the year is €300,000. What is the imputed interest charge?