1.Which of the following expressions is the least accurate calculation for economic income?

A)   Economic income = cash flow – (beginning market value – ending market value).

B)   Economic income = cash flow – economic depreciation.

C)   Economic income = cash flow + change in market value.

D)   Economic income = cash flow – dollar weighted average cost of capital.

2.James Case and Erica Gallardo are considering differences between accounting income and economic income when evaluating capital projects. Case makes the following statements to Gallardo:
 

Gallardo considers both of Case’s statements. Are Case’s statements 1 and 2, respectively, CORRECT?

A)           Yes                                      Yes

B)           Yes                                          No

C)           No                                          Yes

D)           No                                            No

3.Firehouse Company is investing in a

1.Which of the following expressions is the least accurate calculation for economic income?

A)   Economic income = cash flow – (beginning market value – ending market value).

B)   Economic income = cash flow – economic depreciation.

C)   Economic income = cash flow + change in market value.

D)   Economic income = cash flow – dollar weighted average cost of capital.

The correct answer was D)

Economic income is defined as the after tax cash flow plus the change in market value of an investment. The change in market value can also be expressed as economic depreciation. Note that the dollar weighted average cost of capital is a term associated with economic profit, which is a different concept from economic income.

2.James Case and Erica Gallardo are considering differences between accounting income and economic income when evaluating capital projects. Case makes the following statements to Gallardo:
 

Gallardo considers both of Case’s statements. Are Case’s statements 1 and 2, respectively, CORRECT?

A)           Yes                                      Yes

B)           Yes                                          No

C)           No                                          Yes

D)           No                                            No

The correct answer was A)

Case has accurately described the two major differences between accounting income and economic income. Accounting depreciation is based on the original cost of an investment, while economic depreciation is based on the market value of the asset. Also, the interest expense that is subtracted from accounting income is not considered when computing economic income because interest expenses are implicit in the required rate of return used to calculate the asset’s market value.

3.Firehouse Company is investing in a