. Mark resigns from his job as a head chef in a famous restaurant where he earne

Question

. Mark resigns from his job as a head chef in a famous restaurant where he earned $70,000 per year to open his own restaurant last year. He withdrew $50,000 of his own savings that had been earning 4% interest and borrowed another $100,000 from the bank at a rate of 5%. As the restaurant space he was leasing had no separate office, Mark converted his basement apartment into office space. He had previously rented the apartment to a student for $300/month. Also, Mark estimates this entrepreneurial talent or forgone entrepreneurial income to be $10,000 a year. In his first year of business, he earned $600,000 and had the following expenses: Utilities, $10,000; employee wages, $100,000, materials, $300,000, and rent, $25,000. What is the accounting and economic profit? Show work

Explanation / Answer

Revenues 600000 Less: Utilities 10000 Wages 100000 Material 300000 Rent 25000 Interest 5000 ACCOUNTING PROFIT 160000 ACCOUNTING PROFIT 160000 Less: Foregone Salary 70000 Foregone Interest 2000 Foregone Rent 3600 Foregone entrepreneurial income 10000 ECONOMIC PROFIT 74400

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