Tilly’s Trilbies has estimated the following revenues and expenditures for the next fiscal year:

Revenues $6,800,000 Cost of goods sold 5,000,000 Cost of labor 1,000,000 Advertising 100,000 Insurance 50,000 Rent 350,000 Miscellaneous expenses 100,000

a. Calculate Tilly’s accounting profit.

b. Suppose that to open her trilby business,Tilly gave up a $250,000 per year job as a buyer at the exclusive Hammocker Shlumper department store. Calculate Tilly’s economic profit.

c. Tilly is considering purchasing a building across the street and moving her company into that new location. The cost of the building is $5,000,000, which will be fully financed at a simple interest rate of 5%
per year. Interest payments are due annually on the last day of Tilly’s fiscal year. The first interest payment will be due next year. Principal will be repaid in 10 equal installments beginning at the end of the fifth year. Calculate Tilly’s accounting profit and economic profit for the next fiscal year.

d. Based upon your answer to part

c, should Tilly buy the new building?
Explain. (Hint: In your answer, ignore the economic impact of principal repayments.)