The following information pertains to Arnez Company:
$\begin{array}{ll}
\text { Total assets } & \$ 150,000 \
\text { Net operating profit after taxes } & \$ 12,000 \
\text { Total current liabilities } & \$ 110,000 \
\text { Total expenses } & \$ 160,000 \
\text { Total liabilities } & \$ 115,000 \
\text { Total revenues } & \$ 180,000
\end{array}$
Invested capital is defined as total assets minus current liabilities.The after-tax cost of capital is 10%.What is the economic profit?
A) $8,000
B) $20,000
C) $40,000
D) $50,000

Question

Quizplus · Accepted Answer

Economic profit is calculated as net operating profit after taxes minus the after-tax cost of capital multiplied by invested capital. In this case, invested capital is $150,000 - $110,000 = $40,000. The after-tax cost of capital is 10%, so the after-tax cost of capital multiplied by invested capital is $40,000 * 0.10 = $4,000. Therefore, economic profit is $12,000 - $4,000 = $8,000.

The Following Information Pertains to Arnez Company Invested Capital Is Defined as Total Assets Minus Current Liabilities