As an example, consider the writing of Alfred Marshall over 100 years ago. When a man is engaged in business, his profits for the year are the excess of his receipts from his business during the year over his outlay for his business. The difference between the value of the stock of plant, material, etc. The idea of economic profit is the basis of the capital budgeting techniques of net present value and the internal rate of return, which can be found in finance texts over the past thirty years. Economists have been preaching the concept of economic profit for over 100 years and finance professors have been putting students through the rigor of net present value and internal rate of return for thirty years.
Profit is defined as earnings in excess of the cost of capital.
Along with promotion of the concept of economic profit, economics and finance professor have been discouraging the use of accounting-based performance measures for many years. Most of this change can be credited to Stern Stewart's efforts to develop a product that has its foundation in economic and financial theory. The cost of capital is the return required by the suppliers of capital. The secret to creating value. Let step back a moment and look at where this value-added comes from.