Walter has an offer for a one-year long consulting position which will pay him $150,000 after the project has been completed. The contract cannot be renewed. For the duration of this project, he will have to travel frequently for which he will not be reimbursed. The travel costs are estimated to be $25,000.

On the other hand, he has an offer from a friend to be partner in a real estate project. The project will require an initial investment of $500,000 from each partner (Walter and his friend are the only partners). The resale value of the project is expected to be $1.6 million after one year.

Walter has $200,000 saved and gets a return of 4% on his savings per year. He can liquidate this investment any time but will have to pay a penalty of $20,000. He has talked to his bank and he will be able to borrow $300,000, guaranteed by the property, for 8% per annum.

Walter needs to choose between the two offers (he cannot do both jobs simultaneously).

Required

1. Calculate the economic profit of the real estate project. Identify the explicit costs and opportunity costs clearly.

Calculate the economic profit of the consulting project. Identify the explicit costs and opportunity costs clearly.

Answer rating: 100% (QA)

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