Think Break #8• You operate a farm with market value of $700,000 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?

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.

Think Break #8 Answer

• Economic Profit: • Revenues $400,000• Operating Costs –$320,000• Interest –$15,000• Opportunity cost of capital –$20,000• Opportunity cost of time –$40,000

$5,000• Stay on the farm: You are beating the “market” by

$5,000 per year

$700,000–$300,000= $400,000 at 5%