Opportunity Cost of Investments
The Wall Street Journal contained a story about the federal government’s actions to increase corn-based ethanol as a substitute for gasoline in the United States. According to reports, new laws and regulations will result in the construction of hundreds of new ethanol factories over the next decade. Demand for corn to fuel the plants is expected to soar. The plan is to purchase 80 acres of prime farmland for sale in Illinois at a price of $10,000/acre (Brickley, Smith & Zimmerman, 2009, p. 262).
The desire to move from a suburban area to a rural one has an opportunity weight more than the price of spending your savings. But does the opportunity cost of loosing your job solidify the risk of starting a farm from scratch? Your current colleagues have influenced you enough to take this investment into consideration. The data does not support the option to start in investment farming. Farming is comprised of many variables and fixed operating costs. Not to mention the amount of knowledge it would take to logistically make the operation profitable. Two scenarios make themselves catchy in the eye of this investor. One, he purchase the land and hold onto it until the turn around of the harvesting boom of corn. Or two, he purchase the land and work at home as an investment broker while supporting the initial operations of the harvesting. He has the opportunity to create value based on provided information from the market itself. The value would come from the actual investment of land, and in turning that land into a productive and efficient means of harvesting for ethanol.
Brickley, J., Smith, C., & Zimmerman, J. (2009). Managerial Economics & Organizational Architecture. (5th ed., p. 38). New York: McGraw-Hill Irwin.