Ellie, a new university graduate, is offered an accounting job paying $50,000 per year.

Instead of taking it, she withdraws her savings of $200,000, which had been yielding a 5-

percent annual rate of return, and invests it to set up a new business making nutritional

health bars that are keto-friendly. Ellie is excited about the opportunity because the ketodiet

market is growing rapidly and businesses like this normally return 10% on invested

capital. The business has a gross margin of 40%. The $200,000 was spent on market

research, product development, creation of a detailed business plan, and incorporation

costs; all of this spending occurred prior to launch. She also raised an incremental $50,000

in equity from her sister to help with the pre-launch start-up costs. The rent for office space

is $4,000 per year, the cost of administrative help is $30,000, and the cost of equipment

maintenance and leasing is $15,000. Ellie was also earning $2,000 annually renting out

her garage as storage space, but she needed to take over the space to house the company's

inventory. Total revenue in the first year is $150,000. Indications are that revenues may

double in her second year.

a) What is Ellie's accounting profit or loss?

b) What is her economic profit or loss?

c) Given the economic profit/loss, what should Ellie do?

d) How should her sister think about the investment in terms of expected profit?