Profit Assignment

Due < 5 p.m., Thursday, Feb. 3, 2000

 

Howard Rowen is a large cotton farmer. The land and machinery that he owns has a current marker value of $4,000.000, but Rowen owes his bank $3,000,000 on the property loan. Last year Rowen sold $5,000,000 worth of cotton. His variable operating costs were $4,500,000. Accounting depreciation was 440,000 although the actual (real economic) decline in value of Rowen’s machinery was $60,000. (Hint: accountants use accounting depreciation while economists use real depreciation.) Last year he took a "draw" of $50,000, which is not considered part of his variable or fixed costs. Interest on his bank loan, a fixed cost, was $400,000. If Rowen worked for another farmer or a local manufacturer his annual income would be about $40,000. Rowen can invest any funds that could be derived, if the farm were sold, to earn 6 percent annually. Ignore taxes.

 

  1. Enter the revenue and relevant costs into a spreadsheet and compute Rowen’s accounting profits. Put revenue in one column and cost into another column. Set this up as a table and label each dollar amount that you enter.
  2. Enter the revenue and relevant costs into the same spreadsheet and calculate economic profit. Put revenue in one column and cost in another column. Set this up as a separate table and label each dollar amount that you enter.
  3. Use Netscape for your e-mail, and send this assignment to me (shockley@rocko.csuchico.edu) as an attachment.