Questions for Critical Thinking 1
Questions for Critical Thinking 1a. Discussion Questions: 9
b. Problems: 6, 9, and spreadsheet problem (p.37)
9) How Is The Concept Of A Normal Return On Investment Related To The Distinction Between Business And Economic Profit?
The difference between the business and economic profit is that in economic profit, profit or loss is calculated by subtracting opportunity cost of the inputs used from the revenue of sales. On the other hand, accounting or business profit is the difference between the total revenue and total costs incurred to earn that revenue. Now, in business accounting normal return is the minimum profit that is required to cover the costs of inputs and all of the expenses associated with it. It can be a profit just greater than the breakeven profit (which is zero). The normal return on investment is included as part of profit by businessmen and accountants but as part of costs by economists. Thus, business profit minus the normal return on investment or implicit costs equals economic profit. It is economic profit that is important in allocating society’s scarce resources among competing uses. On the other hand, economic profit is just cost estimation. Therefore, normal profit is required in business profit and not in economic profit, which is one of the differences between the two types of profits (Salvatore, 2012).
6) Determine which of the two investment projects of Problem 5 the manager should choose if the discount rate of the firm is 20 percent.
The firm should choose project 1. Because Project 1PV = $100,000 + $100,000 + $100,000 + $100,000 120 (1.20) 2 (1.20) 3 (1.20)4
= $258,873.45Project 2PV = $249,413.26Thus, with a discount rate of 20%.
9) A women managing a photocopying establishment for $25,000 per year decides to open her own duplicating place.
(a) The explicit costs are $81,000.(b) The implicit costs are equal to $25,000.(c) The business profit equals total revenue minus the explicit costs$120,000 - $8l, 000 = $39,000.(d) The...