Lecture-1-Understanding+Public+Financial+Management

This when does not mean however that investors are

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Unformatted text preview: ting a return that provides the appropriate compensation for bearing the risk of the investment. When accounting profit is zero, investors would be better off When investing elsewhere because they are not recovering their full costs. 38 8 38 3 Because accounting profit ignores implicit costs, Because accounting profit is generally higher than economic profit. By maximizing economic profit, the financial By manager can maximize shareholder wealth. manager Suppose an entrepreneur has $100,000 in cash and Suppose also owns a small building. This individual uses the cash to start a new venture and the building as a place of business. of During the next year, the business generates During $200,000 in sales revenues and incurs $150,000 in operating expenditures. 39 9 39 3 The entrepreneur does not take any salary. Instead of The opening the business, the entrepreneur’s next best opportunities were to invest the cash elsewhere and earn $10,000, lease the building for $15,000, and take a job paying $50,000 for the year. Has this entrepreneur made a profit? entrepreneur Solution: The answer depends on the type of profit Solution: under consideration. From an accounting standpoint, the entrepreneur earned a profit because revenues exceed costs by $50,000. After factoring in less obvious costs such as opportunity costs, the entrepreneur actually experienced an economic loss. entrepreneur 40 40 40 41 41 41 Opportunity Costs The cost of an alternative that must be forgone in The order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action. alternative The opportunity cost of studying at KIMEP is the The money you would have earned if you worked instead. On the one hand, you lose four years of salary while On getting your degree; on the other hand, you hope to earn more during your career, thanks to your education, to offset the lost wages. education, 42 42 42...
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This note was uploaded on 02/11/2014 for the course FIN 9891 taught by Professor Wu during the Fall '11 term at Kazakhstan Institute of Management, Economics and Strategic Research.

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