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Economic profit is lower than his accounting profit

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Bryan is trying to decide whether he should give up his job as a software programmer and invest in a start-up. Bryan earns an annual salary of $80,000 and has a saving of $50,000. The start-up would require an initial investment of $600,000. Bryan plans to take a loan from Trust Bank, a local commercial bank, which charges an interest rate of 5 percent on loans and provides an interest of 7 percent on savings deposits. Which of the following is true in this case?

  • Bryan should not invest in the start-up as his economic profit is lower than his accounting profit.

  • The 7 percent interest that Bryan could have earned on his savings will be included in the calculation of his economic profit.

  • The interest rate of 5 percent on loans is a part of the implicit cost of setting up the start-up and will be included in the calculation of his accounting profit.

  • Bryan should invest in the start-up as he has to pay a lower interest rate on loans than he receives on his savings deposits.

Reference no: EM131386002

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