00:01
So here we are having a discussion about economic profit.
00:03
And the definition of economic profit is, first of all, you start with your accounting profit, the sort of tangible cash flows, the tangible profits and losses from your business.
00:14
But then you need to subtract off opportunity cost, right? so what i want to do is go through each of these bullet points and identify what's what.
00:26
So the first one here is your accounting job, right? you would have to quit the job.
00:32
So there is $4 ,000, right? and it would be sort of foregone salary.
00:39
If you open the coffee shop, although your accountant's salary will not appear on the accounting statement of your coffee shop, you're still giving up that $4 ,000.
00:49
You plan to run the business out of the commercial space you own, but you are currently renting it out.
00:56
So yes, it won't cost you anything, but you are giving up the rent, right? so there is minus $2 ,000 foregone rent.
01:04
That's an opportunity cost.
01:05
Just because you won't be paying rent because you own the building doesn't mean you aren't giving up that $2 ,000 a month.
01:12
So we have revenues, right? we expect $8 ,000 in sales.
01:19
So that's a contribution to accounting profit...