Think Break 8

Think Break 8 - You operate a farm with market value of $1...

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Unformatted text preview: You operate a farm with market value of $1 million in land, buildings, machinery, etc. Your debt is $800,000 with an annual interest payment of $80,000 this year. Annual revenue averages $1.5 million with operating costs of $1.35 million. If you sold the farm, you expect to earn a 10% return if you invested the money. You think you could work for the coop 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? Think Break #8 Think Break #8 Answer Accounting Profit: Revenues Operating Costs Interest $1,500,000 $1,350,000 $80,000 $70,000 Haven't dealt with taxes, tax depreciation of machinery and buildings, etc. Think Break #8 Answer Economic Profit: Revenues Operating Costs Interest Opportunity cost of capital Opportunity cost of time Stay on the farm! $1,500,000 $1,350,000 $80,000 $20,000 $40,000 $10,000 ...
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