Sunday, July 08, 2018

An Appraisal of Two Magical Artifacts

I was recently tasked to appraise two magical artifacts. In particular, I was requested to make the assessment purely on the economic benefits and effects of the items, without taking into consideration any innate value (for example, as a curiosity or object of study) the items could possess. In other words, I was asked whether these magical artifacts would serve as good investments capable of reaping decent monetary dividends.

The first item was a small cloth purse with exotic runes woven into the fabric. It was not difficult to cross-reference the runes and thus to identify the artifact; this was a pouch of lesser reward, and it had the wondrous ability of conjuring a single silver coin, weighing about an ounce, each day.

The second item was a refined necromantic ritual which was capable of reanimating a skeleton from a corpse. The skeleton, once magically animated, would be able to execute simple commands autonomously without the need for food, drink, or rest. Based on the text of the tome, the skeleton would be free of decay without requiring further maintenance of any sort. Unfortunately, the ritual depended on several rare components, but it was possible to source for them. The question was simply whether it was economic to do so.

Both magical artifacts attracted much interest. Both promised to generate income forever, and thus seemed to be attractive investments. In particular, the necromantic ritual could potentially be used to replace all simple human labor! These seemed like no-brainers.

I remained unconvinced. The important consideration was the return on investment, which depended on the pricing of the magical items. While it was true that given enough time, both artifacts would generate a positive return, this ignored the opportunity cost of investment. In order words, it might be more profitable to invest in other financial instruments if the magic artifacts were simply too expensive. 

I proceeded to make an assessment on a fair pricing for both the items. First, to be competitive with other investments, the artifacts would have to yield at least an annual return of 3%, otherwise I would easily be better off parking my money in, for example, government securities. The next step would be to estimate the annual return each artifact would generate.

For the pouch of lesser reward, this calculation was simple. A single silver coin a day would fetch about 15 USD, give or take. Thus, over a year the pouch would generate 5475 USD. Based on this, the pouch could cost at most 182,500 USD; if it were any more expensive, it would be a poor investment.

For the necromantic ritual, the annual return would have to be based on the cost of simple labor which the skeleton would replace. A conservative estimate for a sweatshop worker's wages is 1 USD an hour. Compounded over a year, a skeleton would replace 8760 USD worth of wages. At this rate, each ritual could not cost more than 292,000 USD, otherwise foreign labor would be more competitive.

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