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papen

Total sales revenue is 120,000; Cost of materials 30,000; Wages and salaries 20,000; utilities 5,000; Rent 25,000<br /><br />If John decides to quit his job(earning $50,000 per yr) take his $60,000 in savings, and open a dry cleaning store, IF John could have earned $3,000 in interest on the money used to open the store, his economic profit would have been????<br />

UFOexist

Your question is disjointed and not properly framed. You do not give adequate information properly to compute economic profit as defined in two poosible ways. However, I am ging you Notes to help you understand the two alternative definitions and the econoic profit calculationas based on your data. One cannot make out what your looking for. If you are looking for Economic Profit caluculated financial Analysit, it is negative $13,000. If you are looking for Economic Valued added= Valued added - opportunity cost= 85,000 - 53,000=$32,000
See calculastion details below.
1. a. Economic Profit = Economic Value added= 120.000 - 30,000-5,000= 85,000
1.b.. Economic Profit= Accounting Profit - normal profit
= 120,000 - 30,000 - 20,000 -5,000 - 25,000 - normal profit = 40,000 -normal profit= ?
2. Economic Profit= Accounting Profit - opportunity cost
= Accounting Profit - (50,000+3,000)
= Accounting Profit - 53,000
= ?
3. Combining all the information given: Accounting Profit= 40,000 and Opportunity cost, we get economic profit= -13,000 ie. economic loss of $13,000

Notes:The difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. This can be used as another name for &quot;economic value added&quot; (EVA). Don't confuse this with 'accounting profit', which is what most people generally mean when they refer to profit. In calculating economic profit, opportunity costs are deducted from revenues earned. Opportunity costs are the alternative returns foregone by using the chosen inputs. As a result, you can have a significant accounting profit with little to no economic profit. For example, say you invest $100,000 to start a business, and in that year you earn $120,000 in profits. Your accounting profit would be $20,000. However, say that same year you could have earned an income of $45,000 had you been employed. Therefore, you have an economic loss of $25,000 (120,000 - 100,000 - 45,000).
2. An economic profit arises when its revenue exceeds the total (opportunity) cost of its inputs, noting that these costs include the cost of equity capital that is met by &quot;normal profits.&quot; A business is said to be making an accounting profit if its revenues exceed the accounting cost the firm &quot;pays&quot; for those inputs.[1] Economics treats the normal profit as a cost, so when deducted from total accounting profit what is left is economic profit (or economic loss).
3. Economic profit is a RAPM that is widely employed for assessing a firm's financial performance. It is also known by the trademarked name economic value added (EVA). The concept is that a firm only adds value for its shareholders if it makes a profit in excess of what could have been earned if its capital were invested elsewhere. The basic formula is economic profit = NOPAT ? opportunity cost of capital [1]
where NOPAT denotes net operating profit after taxes. A positive economic profit indicates that a firm has added value for shareholders. Implementations of this basic formula vary, both in how they define NOPAT and in how they define the opportunity cost of capital. NOPAT is an accounting concept. Firms report it in their financial statements. Some implementations of economic profit simply use reported NOPAT. Others modify NOPAT to make it, in some sense, more economically meaningful. Various modifications are used in practice, with the choice depending on the nature of a firm's business as well as the inevitable tradeoff between economic significance and simplicity. Generally, modifications are designed to subtract non-cash earnings from reported NOPAT. Examples include:
subtracting earnings due to the amortization of goodwill, deducting extraordinary gains or losses that result from changes in accounting practices,immediately recognizing, instead of accruing, losses from non-performing loans.
The opportunity cost of capital should reflect the expected return on capital obtainable from other, similarly risky ventures. This is not an accounting notion, and there is considerable leeway in how to assign it a value. One issue is how to define a firm's capital. Usually, economic capital is used, but there is flexibility in how this is defined. Another issue is determining what might be the expected return on comparable investments. One standard approach is to employ the capital asset pricing model. The expected return on capital is then calculated using the beta of the firm's stock price.