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Think Break #8

Think Break #8.

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Think Break #8

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  1. Think Break #8 • You operate a farm with market value of $600,000 in land, buildings, machinery, etc. Your debt is $300,000 with an annual interest payment of $15,000 this year. Annual revenue averages $400,000 with operating costs of $320,000. If you sold the farm, you expect to earn a 5% return if you invested the money. You think you could work for the farm co-op in town making $40,000. • What are the accounting profits you obtain for owning and operating the farm? • What are the economic profits you obtain from owning and operating the farm?

  2. Think Break #8 Answer • Accounting Profit: • Revenues $400,000 • Operating Costs –$320,000 • Interest –$15,000 $65,000 • Haven’t dealt with taxes, tax depreciation of machinery and buildings, etc.

  3. Think Break #8 Answer • Economic Profit: • Revenues $400,000 • Operating Costs –$320,000 • Interest –$15,000 • Opportunity cost of capital –$15,000 • Opportunity cost of time –$40,000 $10,000 • Stay on the farm!

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