Finance Formulas / July 13, 2018 / Luz Tyson
Economic profit is a measurement of opportunity cost. Opportunity cost is the value of the trade-off when a decision is made. For example, an individual may consider returning to school to get a degree but in doing so, needs to quit his current job. The individual should consider not only the cost of tuition and books, but the income he forgoes by pursing a degree. This lost opportunity to make money, or opportunity cost, is the underlying purpose of calculating economic profit.
It is important to keep the rate per period and number of periods consistent with one another in the formula. If the loan payments are made monthly, then the rate per period needs to be adjusted to the monthly rate and the number of periods would be the number of months on the loan. If payments are quarterly, the terms of the loan payment formula would be adjusted accordingly.
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