1. Anuradha Sharma, a start up entrepreneur from Bareilly,
has invested Rs 80 lacs in an apparel retail store. Business
has been good, and the store shows an accounting profit of Rs
10 lacs for the last year. This profit is after taxes and after
payment of a Rs 20 lacs salary to Ms. Sharma. This salary is
less than what she could make at another job, which is about
equal to Rs 40 lacs. Considering the risk involved in the
fashion retail business post Covid'19, she believes that a 15
percent after-tax rate of return is appropriate for this type of
investment. (20 marks)
Given this information, calculate the economic profit
earned by Ms Sharma.
What accounting profit would the firm have to earn
in order for the firm to break even in term of economic
Economic profit = total revenue – ( explicit costs + opportunity costs)
Accounting profit = total revenue – explicit costs
Economic profit = Accounting profit - opportunity costs
opportunity costs are the profits that a business misses out on when choosing between alternatives.
difference in salaries = -30
15 percent after-tax rate of return = "-(10\\cdot0.15)=-1.5"
Economic profit = "10+30+1.5=41.5"
break even in term of economic profit:
economic profit = 0
Accounting profit = opportunity costs
Accounting profit = "-30-1.5=-31.5"