- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 1. The Firm and Market Structures
- Subject 2. Economic Profit vs. Accounting Profit
CFA Practice Question
If your new business (in which you have invested $50,000, which you previously kept in savings, earning 10% interest) earns an accounting profit of $30,000 in the first year, and you had previously been employed as a ditch-digger, earning $10,000 per year, your economic profit is ______.
A. $-30,000
B. $15,000
C. $20,000
Explanation: Economic profit is total revenue minus both explicit and implicit costs. Accounting profit includes only explicit costs. Thus, your economic profit is 30,000 - 10,000 (foregone salary) - 5,000 (foregone interest) = 15,000. The $50,000 is not an opportunity cost, because it is not gone, merely invested in the business.
User Contributed Comments 4
| User | Comment |
|---|---|
| kishankolli | I missed out on the Foregone Interest. But How come 50K$ is not opportunity cost. |
| octavianus | $50k is not profit/income (income statement). It is an asset (balance sheet) |
| jacken | $50K is Sunk Cost |
| Horv | $50K is not sunk cost, it is implicit cost. You can hypothetically take your $50K out of your business. |