This ratio will be used in the discussion that follows. Most farmers are dealing with businesses 20 to 200 times larger than this. To fully appreciate this problem, multiply the results here by a factor to approach the size of your business. For convenience, this operation will be the low-equity or highly leveraged operation. Living expenses are paid from an off-farm job and are not deducted from net income.
Net income is assumed to be used to retire debt.
The two assumed rates of return on assets, after all expenses except interest, are 20 and 5 percent. Note that the rate of return on total assets was equal regardless of how they were financed. This makes borrowing large amounts attractive during high-profit times such as the 1970s. This attraction is enhanced even further when the value of the asset is increased by inflation. Since total liabilities are not affected, the increase is added to net worth.