Class Discussion (5 minutes)

Work in groups of four and discuss:

• Given the land value situation above, when will it not be economical not to invest in the land?
• What other factors need to be considered in this decision?

  

To turn a farm into a firm, the farmer must be on the alert in making decisions, typically considering a variety of alternatives and very often, making some calculations which, of course, require record keeping.  In this case, the farmer must always consider when to use accounting valuation and when to use economic valuation.  Accounting valuation tends to be useful for government reporting purposes, such as tax returns. Economic valuation tends to be useful for internal decision making purposes, such as keeping or disposing of equipment.

Similarly important are the issues of profit maximization and minimization of loss.  While most entrepreneurs tend to focus too much on profit making decisions, often times, the minimization of loss is hardly considered. It is strongly advised that even when a situation is expected to result into a loss, the investment still needs to be analyzed to see if there are opportunities to minimize loses.