Integrating Case

Study I

Mahajans Pre-Owned CD
Players

EARM-I, Session-2b Rakesh Saxena, IRMA 1

 Selling price of CD changer = Rs 2000 per
unit
Expected annual unit sales of CD changers
= (800*0.2) + (1000*0.4) + (1200*0.4)
= 1040
Expected annual value of sales
= Rs 2000 x 1040
= Rs 20,80,000
Expected annual rate of return by investors
= 12%
EARM-I, Session-2b Rakesh Saxena, IRMA 2
 Explicit Costs
Purchase cost of CD changers (Rs 1000 x
1040units): Rs 10,40,000
Rent: Rs 2,00,000
Utilities: Rs 1,50,000
Property tax: Rs 50,000
Insurance: Rs 50,000
Salary (self): Rs 2,40,000 (Rs
20,000 x 12 months)
Total: Rs 17,30,000

EARM-I, Session-2b Rakesh Saxena, IRMA 3

Net Accounting Profit
Total Revenue = Rs 20,80,000
Total Explicit Costs = Rs 17,30,000
Net Accounting Profit
= Rs 20,80,000 - Rs 17,30,000
= Rs 3,50,000

EARM-I, Session-2b Rakesh Saxena, IRMA 4

Economic Profit
Implicit
Cost: Difference between
economic and financial values of salary
(self)
= Rs 4,00,000 - Rs 2,40,000
= Rs 1,60,000
Economic Profit
= Net Accounting Profit Implicit Costs
= Rs 3,50,000 - Rs 1,60,000
= Rs 1,90,000
EARM-I, Session-2b Rakesh Saxena, IRMA 5
Value of the Firm
= 1n (1,90,000 / (1+0.12)n ) with n=15
= Rs 1,90,000 x 6.8109
= Rs 12,94,071

Note: If the expected salary is Rs 6 lakhs

instead of Rs 4 lakhs, the annual economic
profit would reduce further by Rs 2,00,000.
Economic profit = Rs 1,90,000 - Rs 2,00,000
= - Rs 10,000

EARM-I, Session-2b Rakesh Saxena, IRMA 6

 Thank You

EARM-I, Session-2b Rakesh Saxena, IRMA 7