A firm produces $65 million of net income on $2,030 million of assets. Given that investors expect a 5% return, what is the economic profit?
A) -$65.0 million
B) -$36.5 million
C) $32.6 million
D) $65.1 million

Question

Quizplus · Accepted Answer

To calculate economic profit, we need to use the formula:
Economic profit = Net income - (Investor's expected return x Total assets)
Investor's expected return = 5% of $2,030 million = $101.5 million
Economic profit = $65 million - ($101.5 million) = -$36.5 million
Therefore, the answer is B. The negative economic profit means that the firm is not generating enough return to meet the expectations of its investors.

A Firm Produces $65 Million of Net Income on $2,030