Question
2. Andrew and Elizabeth own a large tract of land (150 acres) near a major Midwestern city. The couple currently rents out the land for
2. Andrew and Elizabeth own a large tract of land (150 acres) near a major Midwestern city. The couple currently rents out the land for $260 per acre per year to a grain farmer who grows corn, soybeans, wheat, and oats in alternating years. Annual taxes to the local government are $3,000 per year. Andrew and Elizabeth like the current arrangement, as it is hassle-free and a low-cost insurance policy ($300 per year) guarantees the rent payment if the farmer were to default on his payment. In fact, the couple rarely needs to speak to the long-time farmer because the generous return on the farm is like clockwork. Recently, Elizabeth has been talking to her friends who have insisted that she and Andrew would be far better off, return-wise, by turning the tract of land into a golf course. Andrew and Elizabeth hired a consultant to come in and give them a projection of annual revenue, annual expenses, and annual taxes. The consultant was ecstatic over the potential returns as a golf course. He indicated that first year returns on the venture could yield a profit of $15,000 in the first year, growing to $25,000 per year in year five! He likened the golf course operation to an annuity that will just grow and grow over time. The consultant goes on to tell them about the additional prestige of owning a golf course as opposed to owning some crummy farmland. Considering the issue of opportunity costs, answer the following questions: a. Does the golf course look like a good venture for Andrew and Elizabeth given the results of the consultant? b. What about the risk factor of the consultants projections versus the current farming agreement? c. Explain how opportunity costs have played a role in your responses to both (a) and (b). d. Are there any intangibles that could be factored into the notion of opportunity costs?
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