The present value of the stream of accounting profit is $262,431.6044 and The present value of the stream of economic profit is $91,851.0616.
<h3>Present value</h3>
a. The present value of the stream of accounting profit:
Present value=($150,000-$50,000)/1.07 +($150,000-$50,000)/ (1.07)² +($150,000-$50,000)/(1.07)³
Present value=($100,000)/1.07 +($100,000)/ (1.07)² +($100,000)/(1.07)³
Present value=$93,457.9439+$87,343.8728+$81,629.7877
Present value=$262,431.6044
b. The present value of the stream of economic profit:
Present value=($150,000-$50,000-$65,000)/1.07 +($150,000-$50,000-$65,000)/ (1.07)² +($150,000-$50,000-$65,000)/(1.07)³
Present value=($35,000)/1.07 +($35,000)/ (1.07)² +($35,000)/(1.07)³
Present value=$32,710.2804+$30,570.3555+$28,570.4257
Present value=$91,851.0616
Therefore the present value of the stream of accounting profit is $262,431.6044 and The present value of the stream of economic profit is $91,851.0616.
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The complete question is:
an owner can lease her building for $150,000 per year for three years. the explicit cost of maintaining the building is $50,000, and the implicit cost is $65,000. all revenues are received, and costs borne, at the end of each year. if the interest rate is 7 percent, determine the present value of the stream of:
a. The present value of the stream of accounting profit.
b. The present value of the stream of economic profit.
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