Depreciation and opportunity cost of capital발음듣기
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Depreciation and opportunity cost of capital
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[Background voice] Let's think about how we would have accounted for things, if instead of renting our building for $200,000, instead we bought the building for $200,000,000, how would that showed up … how would that have shown up from an accounting profit point of view and an economic profit point of view?발음듣기
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That is the market value of our building at the beginning of our period, at the beginning of year 1.발음듣기
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Maybe, to a large degree, this is because I used the building, there was a lot of traffic in there.발음듣기
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Maybe it was a brand new building before and now it's essentially kind of ... the building itself has taken some wear and tear.발음듣기
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It was not an explicit opportunity cost, but this really is an opportunity cost, because this $100,000 is the opportunity cost of not selling the building a year ago.발음듣기
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I also have the opportunity cost, opportunity cost of capital, of not investing that $200,000,000 some place else.발음듣기
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Another way to think about it is, let's just say that I buy the building and I sell it at the end of the year.발음듣기
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Then, I would have literally lost $100,000 on that transaction and although I might have used it, so I got some value out of it, and I would have lost another $100,000 by not having that money invested in some other use during that period.발음듣기
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These are the 2 non-explicit cost that will come into ... that would show up in our profit statements.발음듣기
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You're kind of using up your capital goods, you are using up your building, you are using up your equipment, you are using up your vehicles, or whatever else you might have.발음듣기
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They say, what was the market value at the beginning of the period, what is the market value at the end, the difference is how much it has depreciated.발음듣기
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In accounting, and I won't go into the details, there are many ways to depreciate something.발음듣기
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You might be able to say, "Well, if the thing is worth $2,000,000 and if it's going to last me 10 years, I can depreciate $100,000 a year, or actually $200,000 a year."발음듣기
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There is different incentives based on if you are the owner of a firm, of how you depreciate.발음듣기
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You might want to actually want to have a lot of depreciation for tax purposes, so that you can somehow hide a profit or whatever.발음듣기
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For the sake of this video, we're going to assume that both the accountants and the economist will mark off $100,000 of depreciation, if we were to buy the building.발음듣기
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Our pretax profit, our pretax accounting profit, pretax profit from an accounting point of view, is going to be … Let's see, 50 minus 200 is 300, minus another ...발음듣기
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Actually, it's gotten better, because my rent was 200 and now I only have a depreciation of 100.발음듣기
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That was because I was renting it for more and now my depreciation, based on how ... what happened with the market rate, actually changed less than what my rent would have been.발음듣기
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The economic profit, at least based on the way we've done the numbers here it will actually come out neutral.발음듣기
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Which it should, because really economic profit, we're just trying to decide, does it make sense for us to run this business in this way.발음듣기
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Maybe if things actually did improve, when we actually changed whether we owned or rent, then that would say that's the more economic way to do it.발음듣기
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We talked about maybe I was a doctor and I'm not working as a doctor to run this restaurant, so my wages foregone are $150,000.발음듣기
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The return we could have gotten on that $2,000,000, that instead we used to buy the building.발음듣기
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I'll call it OCC, opportunity cost of capital, in this situation was the 5% of $2,000,000, another $100,000.발음듣기
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The way that I've worked out the numbers here, we didn't have to spend 200,000 on rent, but we increased our implicit cost by owning the building, by 200,000, so it all comes out the same.발음듣기
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I wanted to really just highlight in this, is that you don't get kind of a freebie on the economic profit when you decide to buy instead of rent, or rent verses buy.발음듣기
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