Definition
Capital charge is the dollar cost of capital applied to invested capital. It is used in EVA and value-based performance analysis.
Formula
Capital charge = invested capital * cost of capital
Example
Invested capital $5M with 10% cost of capital gives a $500k charge.
How to use it
- Use after-tax cost of capital to align with after-tax cash flows.
- Compare operating profit to the charge to assess value creation.
Common mistakes
- Using book capital that excludes off-balance sheet investments.
- Mixing pre-tax profits with after-tax cost of capital.
Why this matters
This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.
Practical checklist
- Write a 1-line definition for "Capital Charge" that your team will use consistently.
- Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
- Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
- Sanity-check with a related calculator from the same category on MetricKit.
- Read the related guide (e.g., WACC explained: how to estimate a discount rate for DCF) for context and common pitfalls.
Where to use this on MetricKit
Calculators
- NPV Calculator: Calculate net present value (NPV) from initial investment, annual cash flow, years, and discount rate.
- IRR Calculator: Estimate internal rate of return (IRR) for an investment using yearly cash flows.
- Discounted Payback Period Calculator: Estimate discounted payback period using a discount rate (and compare to simple payback).
- Cash Runway Calculator: Estimate runway from cash balance, revenue, gross margin, and operating expenses (optionally with revenue growth).
- Break-even Pricing Calculator: Compute contribution margin, break-even units, and profit at a given volume based on price and variable costs.
Guides
- WACC explained: how to estimate a discount rate for DCF: A practical guide to WACC: what it is, how to compute it, and how to use it (carefully) as a DCF discount rate.
- DCF valuation: forecast cash flows, discount rate, and terminal value: A practical guide to DCF valuation and WACC discount rate choices: how to forecast FCF, choose a discount rate, and avoid terminal value traps.