1. 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?

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 –$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%