Mr. Rao runs a business in his own building, which could otherwise be rented out for Rs. 2,40,000 a year. He has invested Rs. 10,00,000 of his own funds, which could earn 8% a year elsewhere. His accounting profit for the year is Rs. 5,00,000. What is his economic profit?

Correct answer: C) Rs. 1,80,000

Explanation

Economic profit = accounting profit - implicit (opportunity) costs. Implicit rent = Rs. 2,40,000; implicit interest = 8% x Rs. 10,00,000 = Rs. 80,000. Total implicit cost = Rs. 3,20,000. Economic profit = 5,00,000 - 3,20,000 = Rs. 1,80,000. Rs. 2,60,000 ignores the rent foregone and Rs. 4,20,000 ignores the interest foregone.