1. What is the Incremental Cost Of Borrowing?

The incremental cost of borrowing represents the additional interest cost incurred for each additional unit of borrowing. It helps businesses and individuals evaluate the cost-effectiveness of taking on additional debt.

2. How Does the Calculator Work?

The calculator uses the incremental rate formula:

Where:

• New Interest — Total interest after additional borrowing
• Old Interest — Total interest before additional borrowing
• Additional Amount — The extra amount borrowed

Explanation: This calculation shows the marginal cost of additional borrowing, which may differ from the average borrowing cost.

3. Importance of Incremental Rate Calculation

Details: Understanding incremental borrowing costs helps in making informed decisions about additional financing, comparing loan options, and optimizing capital structure.

4. Using the Calculator

Tips: Enter all values in the same currency. Ensure the additional amount is greater than zero for accurate calculation.

5. Frequently Asked Questions (FAQ)

Q1: Why is incremental cost different from average cost?
A: Incremental cost reflects the cost of the last unit borrowed, which may be at a different interest rate than previous borrowing.

Q2: When should I use this calculation?
A: Use it when considering additional borrowing to understand the true cost of expanding your debt.

Q3: What if my incremental rate is higher than my current rate?
A: This suggests that additional borrowing is becoming more expensive, which may indicate you're reaching riskier borrowing tiers.

Q4: Can this be used for different types of loans?
A: Yes, this calculation works for any type of debt where you can identify the interest cost changes with additional borrowing.

Q5: How does this relate to weighted average cost of capital?
A: The incremental cost helps determine the marginal cost of debt, which is an important component in WACC calculations for new projects.