1. Christopher has $200,000 to invest, and he is considering the following business opportunity. He would use his $200,000 to buy a mechanical self-service car wash. He'll earn $40,000 per year from customers who drive through and use the water and soap jets to wash their cars. He'll spend $5,000 per year on maintenance and repair of that machine and $6,000 per year on supplies and utilities (water, soap, and electricity), and the car wash itself will depreciate by $7,000. That is, if he tried to sell it at the end of year, he would get only $193,000 for it. Since this car wash is self-service (drivers pay by using an automatic teller), he won't have to hire an attendant. If Christopher doesn't buy the car wash, he could leave his $200,000 in the bank, where it would earn 10% per year.
a. What is Christopher's accounting profit from this self-service car wash business?
b. What is his economic profit from this car wash business?.4.3. Christopher's only goal is to earn as much profit as possible. Should he invest his $200,000 in the car wash business opportunity?
2. Until recently Rosemarie worked as an accountant, earning $30,000 annually. Then she inherited a piece of commercial real estate that had been renting for $12,000 annually. Rosemarie decided to leave her job and operate a Peruvian restaurant in the space she inherited. At the end of the first year, her books showed total revenues of $260,000 and total costs of $230,000 for food, utilities, cooks, and other supplies. Her economic profit at the end of one year is:
3. Table: Present Value of Projects A, B, C, and D
|
Project
|
Dollars realized today
|
Dollars realized 1 year from today
|
|
A
|
-$20
|
|
$75
|
|
|
B
|
101
|
|
-50
|
|
|
C
|
110
|
|
-60
|
|
|
D
|
76
|
|
-24
|
|
(Table: Present Value of Projects A, B, C, and D) Given the information in the accompanying table, if the interest rate were 2%, which project would you choose?