Final answer:
The fair value of the new parcel of land received by Tinsley is $86,000, which includes the market value of the land given up ($72,000) plus the additional cash paid ($14,000). The economic profit of the firm is its accounting profit minus the opportunity cost of capital, such as the potential rental income from land owned by the firm ($30,000 per year).
Step-by-step explanation:
To determine the fair value of the new parcel of land received by Tinsley, assuming the exchange has commercial substance, we can add the original cost of the land given up plus the additional cash paid. The original cost of Tinsley's land is $30,000, and the independent appraisal values it at $72,000, suggesting that the market value could be considered for the exchange. However, the cash paid of $14,000 also needs to be included. Therefore, the fair value of the new parcel of land is the sum of the cash paid and the value of the land given up, which is $72,000 + $14,000 = $86,000.
Related to exercise 7.1, when calculating economic profit, it includes both the accounting profit and the opportunity cost of capital and other resources. If the firm's factory land could be rented for $30,000 per year, this amount represents an opportunity cost because it is forgone rental income. To find the economic profit, one must subtract the $30,000 from the firm's accounting profit for the year.