Managerial Economics: Applications, Strategy and Tactics 12th Edition by James McGuigan, Charles Moyer, Frederick Harris

Exercise 5

Mary Graham worked as a real estate agent for Piedmont Properties for 15 years. Her annual income is proximately $100,000 per year. Mary is considering establishing 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