<p>Company is set up with Rs. 100 and Earns Rs. 3 for the year. During the same period risk-free fixed deposit rates were at 5%. What is the Economic Profit?</p>

<p>Accounting Profit = Rs. 3</p>

<p>Return on Invested Capital = Rs. 3 / Rs. 100 = 3%</p>

<p>Opportunity Cost of Capital = Rs. 5 (5% X Rs. 100)</p>

<p>Economic Profit = Accounting Profit &ndash; Opportunity Cost of Capital</p>

<p>Rs. 3 &ndash; Rs. 5 = Rs. -2 (ECONOMIC VALUE DESTRUCTION)</p>

<p>Economic Profit is Rs.-2 demonstrating that it would have been better to simply invest the Rs. 100 into a fixed deposit and earn Rs. 5 which is risk-free rather than start a Business and earn Rs. 3 which is less than Rs. 5.</p>
