Question

Lisa Conway worked as a real estate agent for Avis Reality for 12 years. Her annual income is approximately $120,000 per year. Lisa is considering establishing her own real estate agency. She expects to generate revenues during the first year of $3 million. Salaries paid to her employees are expected to total $2 million. Operating expenses (i.e., rent, supplies, utility services) are expected to total $300,000. To begin the business, Lisa must borrow $550,000 from his bank at an interest rate of 15 percent. Equipment will cost Lisa $75,000. At the end of one year, the value of this equipment will be $40,000, even though the depreciation expense for tax purposes is only $8,000 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?

Answer 1