Economic profit (EP) is calculated as follows:
A) EP = (ROI - r) * (capital invested) where r = cost of capital
B) EP = (ROI + r) * (capital invested) where r = cost of capital
C) EP = (ROI) * (capital invested)
D) none of the above

Question

Quizplus · Accepted Answer

Economic profit takes into account both the return on investment (ROI) and the cost of capital, as represented by the "r" variable in the formula. This allows for a more accurate assessment of profitability, as it considers the opportunity cost of investing capital in the first place. Option B incorrectly assumes that the cost of capital should be added to ROI when calculating economic profit. Option C does not account for the cost of capital and therefore may overstate profitability. Option D is not a valid response.

Economic Profit (EP) Is Calculated as Follows