Xander Harris Is Considering Buying Corn And Soybean

Xander Harris Is Considering Whether To Buy A Corn And Soybean Farm In

Xander Harris is considering whether to buy a corn and soybean farm in Iowa. The farm will cost $800,000, and Xander will be able to pay this from profits his recently deceased mother made on the stock market and willed to him. He estimates that if he does not run the farm, and keeps his current job as an economic forecaster, he will be able to earn $40,000 a year. The prevailing interest rate is 9 percent. Xander’s only motive is to maximize his income. Should he buy the farm and become a farmer if his annual profit from the farm is likely to be: i.) $160,000? ii) $100,000? iii) $50,000? Make sure to look at this as an economist rather than accountant. What profit figures does he come up with?

Paper For Above instruction

In making a decision about whether to purchase the farm, Xander Harris must consider the opportunity costs and the economic implications of his choices. From an economist's perspective, the decision hinges on comparing the net benefits of being a farmer versus continuing his current employment as an economic forecaster, with particular attention to the opportunity cost of capital and the marginal gains from each option.

The initial investment for the farm is $800,000, which can be financed through the inheritance from his mother. As an economist, Xander should consider whether the returns from the farm exceed his foregone income from his current job and whether the investment is justified when considering the interest rate of 9 percent. Typically, the core analysis involves examining the net present value (NPV) of the farm's profits relative to his alternative employment income.

In this context, the opportunity cost of investing in the farm includes the foregone annual salary of $40,000, which represents what he earns if he chooses not to farm. Conversely, the profit generated by the farm should be viewed not just as the gross revenue, but as the economic profit—accounting for opportunity costs, including the foregone salary and the cost of capital.

Let's analyze the scenarios provided:

Scenario i) Farm profit is $160,000 annually

The net benefit to Xander from the farm would be $160,000. To determine whether this profit justifies his investment, compare it to his current earnings of $40,000 plus the opportunity cost of capital. Since he invests $800,000 at a 9% interest rate, the annual opportunity cost of capital is approximately $72,000 ($800,000 x 0.09). Therefore, the minimum annual profit needed from the farm should cover this opportunity cost plus his foregone salary to justify the investment purely on economic grounds.

Calculating the minimum profit:

• Interest cost of capital: $72,000
• Foregone salary: $40,000
• Total required profit for investment justification: $112,000

Since the farm provides $160,000, which exceeds $112,000, it creates a net economic benefit of $48,000 ($160,000 - $112,000). Hence, from an economist’s perspective, purchasing the farm would be beneficial, maximizing his income relative to his current employment.

Scenario ii) Farm profit is $100,000 annually

Applying the same logic, the profit of $100,000 must be compared with the opportunity costs. The total opportunity cost remains $112,000 (interest plus foregone salary). Since $100,000 falls short of $112,000, the economic benefit of the farm under this profit level is negative. Specifically, Xander would be earning less from farming than he would be from his alternative investment or employment when considering opportunity costs.

Therefore, if the farm's profit is only $100,000 per year, it would not be economically wise for Xander to buy it, as it would reduce his maximum possible income.

Scenario iii) Farm profit is $50,000 annually

Similarly, a profit of $50,000 is significantly below the minimum threshold of $112,000. The opportunity cost of capital plus foregone salary outweighs the farm's profits, resulting in a net loss in economic terms.

From an economist’s perspective, not buying the farm aligns better with maximum income maximization, as continuing his current job and investments yields higher returns or at least avoids a loss.

Conclusions

In summary, when evaluating whether to purchase the farm, Xander should consider the opportunity cost of his capital and foregone salary. His analysis suggests that only when the farm's annual profit exceeds approximately $112,000 (the sum of the foregone salary and the opportunity cost of capital) would the investment be justified from an economic standpoint. Among the scenarios presented, only the $160,000 profit meets this criterion, making the farm purchase advantageous for maximizing income. The $100,000 and $50,000 profit scenarios are insufficient, and purchasing the farm would diminish his overall economic benefit.

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