Question

Questions:

1. Assuming that the tax laws require accountants to use a 10-year straight-line depreciation of the original purchase price net of the salvage value (e.g., a $10,000 piece of equipment with a salvage value of $1,000 would have annual depreciation of ($10,000 - $1,000)/10 = $900), calculate the annual accounting profits.

2. Calculate the economic profits using the average annual opportunity cost of the capital. See ML203's third example for guidance.

	You are given the following information for a healthcare company:
line #
1	Total revenue	18,000,000
2	Total non-capital costs	14,400,000
3	Capital equipment purchase price and original market value	12,000,000
4	Equipment salvage value, as percent of purchase price	12%
5	Depreciable life of the capital equipment, years	15
6	Annual return on capital invested in a similarly risky investment	11%

Answer 1

Computation of Economic profis. nue Total Revenue - Total non capital cost 18,000 000 14, 400,000 3600000 (-) depreciation 112,000,000 x 88%. 15 704ooo 2896000 Profits, (-) opportunity cost [1hs. Annual retumon copita Swetroent) [ 12.000000 x 11.) Economic profit. 1320000 1576000