Question

Also: Why is a dollar today not worth the same as a dollar in the future? How could there be an economic profit but not an accounting profit? Have you had any experience in a job that you have had to make a big decision like this?

Answer 1

A dollar in the present nor worth the same as a dollar in the future because of variables such as inflation and interest rates. Inflation is the general increase in prices, which means that the value of money depreciates over time as a result of that change in the general level of prices. A dollar in the future will not be able to buy the same value of goods as it does today.

Accounting profit = Revenue – Cost of sales

Economic profit = Accounting profit – opportunity cost*

*Where, opportunity cost is the benefit that would have been received through taking the best choice.

Since economic profit is calculated through subtracting opportunity costs from accounting profit, it cannot be bigger than accounting profit.

I had a similar experience when I was working in my previous organization, where we need to decide either to purchase a newly introduced software today or defer it to the future. The price of this software will decrease over time hence we would have saved a lot of money by purchasing it later. But the benefit of buying this software today was greater than the money we would have saved by purchasing it later. Hence, we bought the software, very next day.