Question

Suppose you can invest $10,000 now (Jan 1) buying a plot of land containing a young crop of Xmas trees. All you have to do is wait until December when you can sell 100 trees for an average $30/tree. After all the trees are sold, you can sell the bare land for $7,300. Can we conclude this venture was profitable?

Does it matter how you procured (own savings vs. borrowings) the initial $10,000?

What if you have to visit the plot twice a month for a few hours to make sure all is OK?

Answer 1

1. Yes, since the total revenue (30*100) + 7300 = $10,300 exceeds the initial investment of $10,000 it means the venture was profitable.

2. Yes, if the initial investment was borrowed at an interest rate greater than 3%, it would become a loss venture.

This is because in that case, the interest amount to be paid would become greater than the profit amount earned.

3. If the visits to plot increase and cost of visiting gets added to initial $10,000 then the total cost of plot buying would increase, thereby bringing down the profit margin to 0 or even negative.