Two university graduates Bill and Steve worked for an advert

Two university graduates, Bill and Steve, worked for an advertising agency at an annual salary of $40,000 each for 3 years after they graduated. Then, they decided to quit their jobs and start a partnership that designs and builds Web sites. They rented an office for $12,000 a year and bought capital for $30,000. To pay for the equipment, Bill and Steve borrowed money from a bank at an annual interest rate of 6 percent. During their first year of operation, the partners\' total revenue was $100,000. The market value of their capital at the end of the year was $20,000. If Bill and Steve do not design Web pages, their best alternatives are to return to their previous job.

A. What is the firm\'s economic depreciation?
B. What are the partnership\'s costs?
C. What is the firm\'s economic profit in the first year of operation?

Solution

Bill and steve used to get 40,000 each year and they worked for three years/

Rent of office: 12,000+ Capital 30,000 = 42,000 was spent

In this only rent must be considered as expense and their equipment is still there and it has some value
The value of the leftover equipment is 20,000

A) Economical depretiation is 10,000 + Intrest costs for 30,000

Intrest for 30,000 for one year @ 6% = 1800

10,000+1800= 11.800

B) Costs are straight forward

Rent+ Intrest on equipment

12,000 + 1800

C) Profit - total drawings

100,000 - ( Intrest costs)- rent

100,000- 1800 - 12,000 = 86200