Bacani, Kristine Joy M.

(BSA1-A) Exercise 1
Self-Check Questions

A. Defne and Yasmien have been good friends since high school . When they
graduated in College they decided to put up the :Passionista” , a firm selling clothing
lines for women. Both shared a capital of $75,000 as a start capital for their firm. In
their first year they had sales revenue of $1 million . Passionista spent $600,000 on
labor, l and $200,000 on materials or supplies. Both Defne and Yasmien work for
their company as a salesclerk and managers. Defne used to earn an annual income
of $35, 000 as logistic Manager while Yasmien left her salary of $ 20,000 as a
designer for Passionista.

Answer the following: PLEASE SHOW YOUR SOLUTIONS

1. What was the firm’s accounting profit?

GIVEN:
Total Revenue - $1,000,000
Total Explicit Cost - $600,000 + $200,000 + $150,000 = $950,000
Accounting Profit = ?

FORMULA:
Accounting Profit = Total Revenue - Total Explicit Cost

SOLUTION:
Accounting Profit = $1,000,000 - $950,000
Accounting Profit = $50,000

2. What is the firm's economic profit last year if Passionista sits on land owned by
Defne’s family that it could rent for $30,000 per year.

GIVEN:
Total Revenue - $1,000,000
Total Explicit Cost - $600,000 + $200,000 + $150,000 = $950,000
Implicit cost - $30,000 + $35,000 +$20,000 = $85,000
Economic Profit - ?

FORMULA:
Economic Profit = Total Revenue - ( Implicit Cost + Explicit Cost )

SOLUTION:
Economic Profit = $1,000,000 - ( $85,000 + $950,000 )
Economic Profit = $1,000,000 - $1,035,000
Economic Profit = -$35,000(loss)
 B. Larry Di Manalo has just bought a scratch lottery ticket and won $10,000. He wants to
finance the future study of his newly born daughter and invests this money in a fund with a
maturity of 18 years offering a promising yearly return of 6%. What is the amount available on
the 18th birthday of his daughter?

(1) Calculate future value or present value or annuity ?

(2) Future value
Formula:
Future value = PV * (1+ i)n
Items:
PV = $10,000
i = 6%
n = 18 years
Solution:
FV = $10,000 * ( 1+6% )18
FV = $10,000 ( 1.06 )18
FV = $10,000 (2.854339153)
Future Value = $28,543.39

(2)Present Value
Formula:
Present Value = PV = FV/CF
_______
(1 + i)n

n = 20 years
Items:
FV = $28543.39
i = 6%
n =20 years
Solution:
PV = $28543.39
______
(1 + .06)20

PV = $28543.39
______
(1.06)20

PV = $28,543.39
______
3.207135472

Present Value = $8,899.96