An interest payment on a loan to a firm is considered

• A. Implicit
• B. Sunk
• C. Explicit
• D. Opportunity cost

Answer: (C)

Interest payments are explicit costs. They involve an actual cash outlay to lenders and show up as interest expense on the income statement, reducing profits. Explicit costs are those outlays you pay directly, unlike implicit costs which are the opportunity costs of using resources you already own. It isn’t a sunk cost (which is a cost already incurred and unrecoverable); nor is it describing an opportunity cost in the typical sense, since the term explicit specifically refers to cash payments. So the best classification is explicit cost.