Final answer:
Capitalizing interest during asset construction includes an imputed interest cost on stock financing, reflecting the opportunity cost of internal funds. Firms calculate investment levels based on the effective rate of return, balancing actual interest rates with societal returns.
Step-by-step explanation:
When capitalizing interest during the construction of an asset, it's important to understand that the cost of capital can include not only explicit interest on borrowings but also an imputed interest cost on stock financing. This is a reflection of the opportunity cost of tying up internal funds in a project as opposed to investing them elsewhere. While companies like General Motors or startup firms in the computer software industry often need financial capital from outside investors, when they choose to use their own funds, they are effectively foregoing the potential returns those funds could have generated elsewhere.
For example, if we consider an interest rate of 9%, and the firm has the opportunity to generate a 5% return to society from its investment, then the firm's internal calculations would treat the cost of financial capital as if it had an effective rate of return of 4%. This influences their investment decisions such as determining how much to invest. In the given scenario, if the real interest rate is 9%, reduced by the societal return rate of 5%, then the firm might decide to invest a calculated amount of $183 million.