CFA Practice Question

There are 539 practice questions for this study session.

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.
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