Howard Bowen is a large cotton farmer. The land and machinery he owns has a current market value of $4,000,000. Bowen owes his local bank $3,000,000. Last year Bowen sold $5,000,000 worth of cotton. His variable operating costs were $4,500,000 and his depreciation on machinery was $60,000. Interest on the bank loan was $300,000. If Bowen worked for another farmer or a local manufacturer, his annual income would be about $50,000. Bowen can invest at 10% any net funds that would be derived from the sale of the farm (sale price less debt payoff). He projects that his costs and revenue will be similar this year if he continues farming.
a. What is Bowen's accounting profit from farming an additional year?
b. What is Bowen's economic profit from farming an additional year? What should he do? Explain.