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15 April, 18:44

A tech company has just completed market research on a potential new project that would last three years. The research cost $150,000 and determined that the project is expected to bring in $200,000 of revenue annually. The company will have to lease a plant for a total three-year cost of $100,000 and calculates that materials and labor will cost 60 percent of revenue. Given this information, what will economic profits be for the three years, and should the project be adopted

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  1. 15 April, 18:57
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    Profits for the three years = $140,000

    Explanation:

    Given:

    Research cost = $150,000

    Annual revenue = $200,000

    Total revenue = 3 x $200,000 = $600,000

    Three-year lease cost = $100,000

    Labor cost = 60% of revenue

    Find:

    Profits for the three years = ?

    Computation:

    Net Revenue = Total revenue - research cost - three-year lease cost

    Net Revenue = $600,000 - $150,000 - $100,000

    Net Revenue = $350,000

    Profits for the three years = Net Revenue - labor cost

    Profits for the three years = $350,000 - 60% ($350,000)

    Profits for the three years = $350,000 - 210,000

    Profits for the three years = $140,000

    There will be profit of $140,000. So project should be adopted.
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