• The accounting profit's present value is $217,859.
• The present value of the economic profit amounts to $68,000.
Further Explanation:
Accounting profit:
Accounting profit refers to the excess of total revenue above costs, where costs include only explicit expenses. Explicit costs are the measurable business expenses in monetary terms necessary for daily operations and income generation.
Economic profit:
Economic profit is derived by deducting implicit costs from the accounting profit. Implicit costs encompass the non-monetary costs and lost opportunities related to revenue generation.
Calculate the present value of the accounting profit:
Firstly, determine the accounting profit by subtracting the explicit costs from the lease value.
\begin{aligned}\text{Accounting profit}&=\text{Lease value}-\text{Explicit cost}\\&=\$120,000-\$40,000\\&=80,000 \end{aligned}
Calculate the present value:
\begin{aligned}\text{Present value of Accounting profit}&=\text{Accounting profit}\times{FVA_{5\%,3 years}}}\\&=\$80,000\times{2.72}\\&=217,859\end{aligned}
Consequently, the accounting profit's present value equals $217,859.
Calculate the present value of the economic profit:
Initially, calculate the economic profit by taking implicit costs away from the accounting profit.
\begin{aligned}\text{Economic profit}&=\text{Accounting profit}-\text{Implicit cost}\\&=\$80,000-\$55,000\\&=\$25,000\end{aligned}
Calculate the future value:
\begin{aligned}\text{Present value of Economic profit}&=\text{ Economic profit}\times{FVA_{5\%,3 years}}}\\&=\$25,000\times{2.72}\\&=\$68,000\end{aligned}
Thus, the economic profit's present value is $68,000.
Learn More:
1. Discover more about the competitive market
2. Explore more about interest rates
3. Learn about investments
Answer Details:
Grade: Middle school
Chapter: Economic profit
Subject: Economics
Keywords: lease, building, three, years, explicit, cost, maintaining, building, implicit cost, revenues, costs, borne, interest, rate, determine, present, value, stream, accounting profits, economic profits
