Question

A tech company has just completed market research on a potential new project that would last three years. The research cost $150,000 and determined that the project is expected to bring in $200,000 of revenue annually. The company will have to lease a plant for a total three-year cost of $100,000 and calculates that materials and labor will cost 60 percent of revenue. Given this information, what will economic profits be for the three years, and should the project be adopted

Answer 1

Profits for the three years = $140,000

Step-by-step explanation:

Given:

Research cost = $150,000

Annual revenue = $200,000

Total revenue = 3 x $200,000 = $600,000

Three-year lease cost = $100,000

Labor cost = 60% of revenue

Find:

Profits for the three years = ?

Computation:

Net Revenue = Total revenue - research cost - three-year lease cost

Net Revenue = $600,000 - $150,000 - $100,000

Net Revenue = $350,000

Profits for the three years = Net Revenue - labor cost

Profits for the three years = $350,000 - 60%($350,000)

Profits for the three years = $350,000 - 210,000

Profits for the three years = $140,000

There will be profit of $140,000. So project should be adopted.