Question

An owner can lease her building for $120,000 per year for three years. The explicit cost of maintaining the building is$40,000, and the implicit cost is 555,000. All revenues are received, and costs borne, at the end of each year. Ifthe interestrate is 5 percent, determine the present value of the stream ofa. Accounting profits.b. Economic profits.

Answer 1

A) accounting profit = $217,860

B) economic profit = $68,081

Step-by-step explanation:

A) accounting profit per year = total revenue - maintenance costs = $120,000 - $40,000 = $80,000 per year

the present value of the cash flows = $80,000 / 1.05 + $80,000 / 1.05² + $80,000 / 1.05³ = $76,190 + $72,562 + $69,107 = $217,860

B) economic profit per year = accounting profit - implicit costs = $80,000 - $55,000 = $25,000 per year

the present value of the cash flows = $25,000 / 1.05 + $25,000 / 1.05² + $25,000 / 1.05³ = $23,810 + $22,676 + $21,596 = $68,081