Question

After working for 25 years as personal fitness trainers while raising their​ kids, three sisters cashed in a total of ​$80 comma 000 in bonds and decided to open a​ small, neighborhood fitness center. They spent the ​$80 comma 000 on exercise​ equipment, advertising, computer​ equipment, and other furnishings for the business. For the next 3​ years, they took in ​$150 comma 000 in revenue each​ year, paid themselves ​$35 comma 000 annually​ each, and rented a space in a strip mall for ​$22 comma 000 per year. Before the​ investment, their ​$80 comma 000 in bonds were earning interest at a rate of 15 percent. Are they now earning economic​ profits? Explain​ your answer.

Answer 1

Let’s look at the facts,

Original Investment: $80,000
Income: $150,000/ year
Salary: $105,000
New space: $22,000

Income: $150000
- Salary: $105000
- New Space: $22000
======================
Profit: $23000/ year
After 3 years they would have made, $69,000

Now had they left the original $80000 invested @ a rate of 15% annually (assuming its compounded), after 3 years they would have $121,670

So economically speaking, they didn’t make the right choice