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 $55,000. All revenues are received, and costs borne, at the end of each year. If the interest rate is 5 percent, determine the present value of the stream of: A. Accounting Profits B. Economic Profits

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Business

Lillian Harding

2 September, 13:47

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 $55,000. All revenues are received, and costs borne, at the end of each year. If the interest rate is 5 percent, determine the present value of the stream of: A. Accounting Profits B. Economic Profits

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Emery Sampson · Answer 1

A) Accounting profits dont take implicit costs into account, only "real" or quantifiable costs. Thus the present value of a 120,000 lease at 5% for three years with explicit costs of $40,000 maintenance is:

PV = [ FV / (1+r) ^n ] - (Explicit Cost)

PV = 120000 / (1.05^3) - (40000*3) B) same thing but add implicit costs ...

PV = 120000 / (1.05^3) - (40000*3) - (55000*3)