Answer to Question #284774 in Accounting for akein

Question

You are the manager of a Fortune 500 hotel chain and must decide where to locate a new hotel. Based on tax considerations, your accounting department suggests that Atlantic City is the best choice, followed closely by Las Vegas. In particular, your current-year tax savings from locating in Atlantic City are $4 million but only $3 million in Las Vegas. Your marketing department, on the other hand, has provided you with sales estimates that suggest that the present value of the gross (of taxes) operating profits from locating in Atlantic City are only $10 million but are $14 million for Las Vegas. It will cost $14 million to build the hotel in either location. Ignoring all other considerations, where should you build the hotel? What are your firm's economic profits if you locate the hotel in Atlantic City?

Answer 1

Solution:

You should build the hotel in Las Vegas since it will be more profitable than building it in Atlantic City. The benefits of building the hotel in Las Vegas outweigh the costs to be incurred by a lot thus providing an excellent opportunity.

 

Economic profit = Total revenue – (explicit costs + implicit costs) or Accounting profit – implicit costs

Accounting profit = 10 million

Implicit costs = 4 million (Opportunity costs foregone in Las Vegas)

 

Economic profit = 10 – 4 = 6 million

Economic profit = 6 million