Suppose you are considering starting your own consulting firm. You estimate if that if you did not start the firm, your starting salary at a job would be $40,000/yr. The revenues from this firm are expected to be $1,500,000. Some of the expenses you expect to encounter is $25,000 for an employee and operating costs (rent, supplies, utilities, etc.) of $500,000. To begin the business, you must borrow $100,000 from the bank and pays 8% interest in the loan and also uses $50,000 of your own money that was in a savings account previously earning 2% interest. Equipment (computers, etc.) will cost $20,000.
a. Determine the pre-tax accounting profit of this firm
b. Determine the pre-tax economic profit of this firm
c. Which costs are explicit and which costs are implicit?