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You own a 25 acre strawberry farm. You currently lease the land to a strawberry farmer...

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Finance

You own a 25 acre strawberry farm. You currently lease the landto a strawberry farmer for $14,000 per year. Your annualadministrative (or fixed) costs from owning the farm areapproximately $2,000 per year.

1. You could sell the land for $160,000 today and currently havean investment opportunity for the $160,000 from which you expect tomake a return of 8% per year.

a.        What are youraccounting profits for the year?

b.       What are youreconomic profits for the year?

c.       Should you sell theland today? Explain why.

2. Now, suppose that price of the land is expected to decreasefrom its current value of $160,000 to $155,000 next year. Shouldyou lease the land for $14, 000 for one year and wait to sell theland at the end of the year for $155,000? Or should you forgetleasing and just sell the land for $160,000 today at its currentvalue? Explain why. (ignore the time value of money, for now).

Answer & Explanation Solved by verified expert
4.0 Ratings (610 Votes)
Answer 1a Accounting profits for the year Lease income annual administrative or fixed costs 14000 2000 12000 Accounting profits for the year 12000 Answer 1b You could sell the land for 160000 today and currently have an investment opportunity for the 160000 from    See Answer
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