Suppose you have $10,000 in a savings account that earns 4% interest. Further, suppose you were...

Suppose you have $10,000 in a savings account that earns 4% interest. Further, suppose you were to take all $10,000 out and start a business. After a year you sell the business for $15,000

a- What is the accounting profit you made on the sale of this business?

b-What is the economic profit you made on the sale of this business?

Solutions

Expert Solution

a. Accounting profit earned is $ 5,000

Explanation is as follows:

Sale of business: $ 15,000

Less: Investment made: $ 10,000

Accounting profit earned: $5,000

Reqb: Economic Profit earned is $ 4,600

Explanation is as follows:

Sale of business: $15,000

Less: Investment made: $10,000

Less: Loss of revenue in form of interest ($10,000@4%): $ 400

Economic Profit earned is: $4,600

Note: economic profit takes in to consideration theh opportunity cost of resources employed by the owner.

Rahul Sunny answered 1 year ago

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