ACCOUNTING PROFITS VS ECONOMIC PROFITS
earning $2500 per year ($50,000 x 0.05), the house
earns $1000 more than the next best opportunity
(the bonds). The difference between what the
house earns and what the next best opportunity
(the bonds) earns is called economic profit. The
“economic income statement” on slide 3 calculates
this economic profit. Since the house has a larger
economic profit than its next best opportunity, the
house is a good investment an should be undertaken.