Question

Use the scenario below to answer the following questions:

The Great Recession of 2007-2009 severely depressed world trade, the demand for tanker services, and the daily rental rate for tankers. Mr. Donald Trump-CEO of Trump Tanker Shipping - remarked:
"Those who have a lot of debt are suffering ....... If you're collecting $10,000 a day and you have a cash breakeven of $25,000 a day, that's a $15,000 a day loss."
By contrast, Mr. Trump felt that his company was well placed to survive the downturn as it carried no debt. A tanker could make a profit with a rate of $10,000 a day.
a. Suppose that the operating costs (variable costs) of a tanker are $8,000 a day, and, for a debt-financed tanker, the interest cost is $17,000 a day. Given revenues of $10,000 a day, what's the accounting profit of a debt-financed tanker per day? What's the economic profit of a debt-financed tanker per day?
b. Suppose that it costs $1,500 a day if you take a tanker out of active service. With the interest cost $17,000 a day, what's the accounting profit of a debt-financed laid-up tanker per day? What's the economic profit of a debt-financed laid-up tanker per day?

Answer 1

The accounting profit of a debt-financed tanker is -$15,000 per day. The economic profit is also -$15,000 per day. For a debt-financed laid-up tanker, both the accounting and economic profit are -$17,000 per day.

Step-by-step explanation:

To calculate the accounting profit of a debt-financed tanker per day, we subtract the variable costs (operating costs) and interest costs from the revenues. In this case, the accounting profit would be $10,000 - ($8,000 + $17,000) = -$15,000. The economic profit takes into account both explicit and implicit costs. Since the interest cost is an explicit cost, the economic profit would be the same as the accounting profit, which is -$15,000 per day.

For a debt-financed laid-up tanker, the accounting profit per day would be -$17,000 (interest cost), since there are no revenues. The economic profit would also be -$17,000, as there are no implicit costs in this scenario.