You have worked as a real estate agent for 10 years and are earning about $100,0

Question

You have worked as a real estate agent for 10 years and are earning about $100,000 per year with your current agency. You prepared the following information to use in evaluating the financial feasibility of starting your own agency:
Revenues generated during the first year of operations: $1.5 million
Salaries and other labor costs paid to employees during the first year of operations: $1 million
Operating expenses (e.g., rent, communications: $150,000
Equipment purchases: $100,000 with a 5 year straight line depreciation

You need $100,000 in equity, which you can withdraw from your bank account that is currently paying 2% per year in interest, and a $400,000 loan with a 15% interest rate.

What is your expected pretax economic profit from your proposed agency?

Explanation / Answer

Accounting Profit =Revenue -Cost Interest =$400,000*15%= $60,000 Depreciation =$100,000/5 = $20,000 Accounting Profit =$1.5 million -$1 million -$150,000 -$20,000 -$60,000 = $270,000

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