Question
Suppose your company has borrowed $100,000 at 5% interest for three years to buy the rights to a trademark for marketing purposes. There are three
Suppose your company has borrowed $100,000 at 5% interest for three years to buy the rights to a trademark for marketing purposes. There are three potential trademarks you are considering, and each will increase your profits over the next three years but in different ways. The table below shows the additional revenue your company would earn in each of the next three years (year 1, year 2 and year 3) for each of the three potential trademarks. Assume you MUST buy one of the three trademarks (you cannot return the money or do something else with it).
Additional profit in year 1 | Additional profit in year 2 | Additional profit in year 3 | |
Trademark #1 | $30,000 | $40,000 | $40,000 |
Trademark #2 | $40,000 | $40,000 | $30,000 |
Trademark #3 | $25,000 | $40,000 | $50,000 |
- What is the present value of the additional revenue for each of the three trademarks?
- What is the accounting profit from choosing each of the three trademarks?
- What is the economic profit from choosing each of the three trademarks?
- Is there any difference between using accounting and economic profit to determine whether a trademark is a good investment choice or not?
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