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18 December, 22:29

Mary Graham worked as a real estate agent for Piedmont Properties for 15 years. Her annual income is approximately $100,000 per year. Mary is considering estab - lishing her own real estate agency. She expects to generate revenues during the first year of $2 million. Salaries paid to her employees are expected to total $1.5 million. Operating expenses (i. e., rent, supplies, utility services) are expected to total $250,000. To begin the business, Mary must borrow $500,000 from her bank at an interest rate of 15 percent. Equipment will cost Mary $50,000. At the end of one year, the value of this equipment will be $30,000, even though the depreciation expense for tax purposes is only $5,000 during the first year. a) Determine the (pre-tax) accounting profit for this venture.

b) Determine the (pre-tax) economic profit for this venture.

c) Which of the costs for this firm are explicit and which are implicit?

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  1. 19 December, 00:32
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    Answer and Explanation:

    The computation is shown below:

    a. The pre tax accounting profit is

    = Revenue - operating expenses - salaries - depreciation - interest on loan

    = $2,000,000 - $250,000 - $1,500,000 - $5,000 - ($500,000 * 15%)

    = $2,000,000 - $250,000 - $1,500,000 - $5,000 - $75,000

    = $170,000

    b. The pre tax economic profit is

    = Revenue - operating expenses - salaries - foregone income - actual depreciation - interest on loan

    = $2,000,000 - $250,000 - $1,500,000 - $100,000 - $20,000 - $75,000

    = $55,000

    The actual depreciation is

    = $50,000 - $30,000

    = $20,000

    c. The explicit cost is the cost which includes wages & salaries, operating expense, depreciation expenses etc while the implicit cost includes the opportunity cost and annual depreciation cost
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