Norita has a job as a manager in a bakery shop in Jitra earning RM30,000/year. She is considering to take another job as a manager of another bakery shop in Alor Star for RM40,000/year or to purchase a bakery shop in Jitra that will generate a revenue of RM200,000/year.
To purchase the bakery shop, Norita would have to use her RM20,000 savings and borrow another RM80,000 at an interest rate of 10% per year. The bakery shop that Norita intend to purchase has additional expenses of RM80,000 for supplies, RM40,000 for hired worker, RM10,000 for rent, and RM5,000 for utilities.
Assume that income and business taxes are zero and that the repayment of the principal of the loan does not start before three years.
What would be the business (accounting) and economic profit if Norita decided to purchase the bakery shop? Should Norita purchase the bakery shop? Explain.
Suppose that Norita expects that another bakery shop will open in Jitra at the end of three years and this will drive the economic profit of her bakery shop to zero. What would the revenue of her bakery shop be in three years?