10 
equipment at present result from earlier expenditures. This can lead to the 
principle of valuing these benefits at the so-called replacement value of the 
equipment, rather than its actual costs. 
The main objections to this principle are that it is not applicable to 
leased equipment, and that it leads to hidden profits when equipment is 
purchased with own or loaned funds. Whenever applied, however, it will 
certainly be cumbersome to determine individual adjustments for all items 
of equipment, and so in order to cope with the general inflation trend, a fair | 
compromise could be obtained with the use of general cost indices for capital | : 
investments such as equipment and buildings. Additional problems are intro- e & 
duced when more efficient items of equipment are marketed, available items 
thus becoming economically obsolete prior to the foreseen period. In these 
instances, the cost standards used should be based not on the actual equip- 
ment costs but on adjusted lower values. 
Turning now to the problem of interest on capital investments, the 
interest on loans is a real item of expenditure to a commercial organisation 
and is, as such, readily identifiable as a cost element. This view of interest is 
applicable also to investments financed with own funds, as this would only 
influence the conventional concept of profit. Investments by government 
agencies on the other hand are normally considered to be made “a fond perdu”, 
whereby the interest element is usually neglected. This is a questionable policy 
since it tends to distort the true economic picture. Although interest on 
governmental investments does not constitute a real item of expenditure to 
an individual governmental organisation, it is a social cost and should be taken 
into account, particularly in instances such as when developing countries have 
to finance purchases with foreign exchange. This element of social cost could 
be conveniently introduced in the latter example by expressing the so-called e o 
"availability value" of foreign exchange in terms of an appropriate interest 
rate. Whenever interest is to be considered as a cost item, constant cost 
standards can still be computed by determining the depreciation in the form 
of annuities. A sample of these annuity factors is given in figure 3, more 
detailed tables can be found in financial journals .