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We have already hinted that capital costs are a major component of marketing costs. Such costs will vary from country to country depending on the level of interest rates. They include:
-the cost of money needed to buy produce and keep it in store. Many small traders buy produce, sell it and use the proceeds to buy more, so their needs for operating capital are limited. Traders who buy produce and store it for lengthy periods will, on the other hand, have sizeable operating capital requirements. In some countries traders buy from farmers in advance of the harvest, that is they buy the "field" or the "tree". Thus they will have to finance the produce they buy for even longer periods and their marketing costs will, consequently, be higher;
The calculation of capital costs for a small consignment of produce is far too complex an operation when the aim of the exercise is simply to work out marketing costs of vegetables from a group of farmers to a nearby urban market. As noted in other chapters it is best to use commercial rates for the hire of services, such as transport rates, storage rates or contract milling charges, even if the trader is using his own vehicle or other facilities. These commercial rates will already have capital costs built in by the trucker, warehouse owner, or others.
However, extension workers may be asked to advise a Cooperative on whether to build a store, construct a maize mill or purchase a truck. Under these circumstances it is necessary to compare the capital and depreciation costs with the expected annual return from the Cooperative's activities after the direct operating costs have been covered. Capital costs are the interest paid to the bank on the loan. Assuming interest rates stay constant, this interest can be estimated in advance on a yearly basis if you know how much of the "principal" (that is, the total amount borrowed) is paid back every year.
Depreciation can be calculated on a "straight line" basis. Here, the life of the vehicle or building is estimated and its cost, minus its "salvage" or "scrap" value at the end of its working life, is divided by the number of years of its life to get the annual depreciation. An alternative, and more accurate approach, is to assume depreciation at a fixed percentage per year. In this way the value goes down more rapidly in the early years than later. If, for example, a $10 000 truck is depreciated at 10 percent then the depreciation in the first year is $1 000 and in the second year $900 (that is 10% of $10000—$1 000).
Even if depreciation is taken into account, a calculation could still give a misleading impression of an organization's profitability. This is particularly the case in countries with high inflation levels. If an asset is depreciated on the basis of its purchase price this will underestimate the funds needed to replace the asset when it can no longer be used. For instance, a truck costing $10 000 now will cost more than $60 000 to replace after ten years if inflation is 20 percent per year. In this case the truck should be revalued at its assumed replacement value and the revalued figure should be depreciated as above.