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    • 1. FARM MANAGEMENT
      • WK 5: CAPITAL BUDGETS
      • (INVESTMENT ANALYSIS)
      MM WATERLOO
    • 2. FARM MTG CONCEPTS
      • WK 1: INTRODUCTION
      • WK 2: ECONOMICS & FARM RECORDS
      • WK 3: BUDGETS
      • WK 4: WHOLE FARM BUDGETS
      • WK 5: CAPITAL BUDGETS
      • WK 6: MACHINERY MANAGEMENT
      • WK 7: LAND MANAGEMENT
      • WK 8: CREDIT MANAGEMENT
      • WK 9: HUMAN RESOURCE MANAGEMENT
      • WK 10: SUCCESSION MANAGEMENT
    • 3. TEXT BOOK READING ON CAPITAL BUDGETING
      • FARM MANAGEMENT, 4th Ed
      • KAY & EDWARDS
      • CHAP 17: PG 309-332
      WK 5: CAPITAL BUDGETS
    • 4. DISCUSSION POINTS
      • I. INTRODUCTION
      • II. CAPITAL BUDGET STEPS
      • III. NON-TIME METHODS
      • A. PAYBACK
      • B. ACCT RATE OF RETURN
      • C. BOOK RATE OF RETURN
      • IV. SUMMARY
      WK 5: CAPITAL BUDGETS V. TIME METHOD A. TIME VALUE OF MONEY B. NET PRESENT VALUE METHOD C. BENEFIT COST RATIO D. INTERNAL RATE OF RETURN E. SUMMARY
    • 5. I. INTRODUCTION
      • A. DEFINITION: ALLOCATION OF RESOURCES FOR MAJOR AND/OR LONG TERM PROJECTS
      • B. ASSUMPTIONS
      • 1. UNLIMITED PROJECTS
      • 2. LIMITED RESOURCES
      WK 5: CAPITAL BUDGETS
    • 6. IV. TIME VALUE OF MONEY
      • YEAR 1: $100 * .10 * 1 YR = $110.00
      • YEAR 2: $110 * .10 * 1YR = $121.00
      • YEAR 3: $121 * .10 * 1 YR = $133.10
      • LUMP SUM
      • INVESTMENT
      • $100
      1st YR INTEREST 10% * 100 = $10 2nd YR INTEREST 10% *(100+10) = $11 3rd YR INTEREST 10% *(100+10+11)=12 A. FUTURE VALUE (COMPOUNDING) 1. ...OF A LUMP SUM FUT VAL = LUMP SUM*(1+i) N =$100 *(1+.10) 3 = $133.00
    • 7. USING CALCULATOR
      • INSTRUCTION RESULT
      ENTER 1 1 PRESS + ENTER INTEREST AS DECIMAL .1 PRESS = 1.1 PRESS 2nd OR SHIFT PRESS X Y ENTER NUMBER OF YEARS 3 PRESS = 1.331 PRESS * ENTER LUMP SUM (PRESENT VALUE) 100 PRESS = Val of $100 3 yrs from now if 133.10 left to compound
    • 8. 2. …OF A YR END ANNUITY
      • END 1st YR; $100 * (1+ .1) 2 = $121.00 END OF 3rd YR
      • END 2nd YR; $100 * (1 + .1) 1 = $110.00 END OF 3rd YR
      • END 3rd YR; $100 * (1 + .1) 0 = $ 100.00 END OF 3rd YR
      • $331.00
      • $331
      YR 1 INVEST $100 YR 2 INT $10 YR 3 INT $11 YR 2 INVEST $100 YR 3 INVEST $100 YR 3 INT $10 = FUT VAL = INV STREAM *(1 + i) N -1 i
    • 9. B. PRESENT VALUE (DISCOUNTING) 1. ... OF A FUTURE LUMP SUM
      • PRES VAL (@10%) OF $ 100 RECEIVED 3 YR FROM NOW?
      • PRES VAL = FUTURE VALUE *[ 1/((1+.1) N )]
      • PRES VAL = 100 *[1/(1 + .1) 3 ] = $75.13
      • PROOF: $75.13*(1 + .1) 3 = $99.998
      $ ? LUMP SUM $82.60 $100 FUTURE VALUE IN 3 YRS $75.13 $90.01 $8.31 $7.47 $9.09
    • 10. 2. .... OF AN INVESTMENT STREAM
      • END 1st YR; $100 * .909 = $90.90 (PRES VAL)
      • END 2nd YR; $100 * .826 = $82.60 (PRES VAL)
      • END 3rd YR; $100 * .751 = $75.10 (PRES VAL)
      • $248.60
      • $248.60 IS MAX TO PAY FOR INVEST THAT PAYS $100/YR ANNUITY @ 10% INTEREST
      • PRES VAL = INV STRM*[1-(1 + i) -N ]/i
      • $75.13
      • PRES
      • VAL
      $82.60 PRES VAL $90.91 PRES VAL $9.09 $7.47 $8.31 $9.09 $8.31 $9.09 $248.60 $75.13 + 82.60 + $90.91 PRESENT VALUE AT 10% TO GIVE $100 A YR FOR 3 YRS =
    • 11. IV. PRESENT VALUE METHODS
      • A. NET PRESENT VAL & BENEFIT/COST
      • 1. ADVANTAGES
      • a. CONSIDERS TIME VAL OF $
      • b. FOCUS ON CASH FLOWS
      • 2. DISADVANTAGES
      • a. MORE COMPLEX CALCULATIONS
      • b. ASSUMES REINVESTMENT AT
      • RATE OF RETURN
    • 12. B. NET PRESENT VAL CALCULATION
      • INVESTMENT
      • CASH FLOW 1
      • CASH FLOW 2
      • CASH FLOW 3
      • CASH FLOW 4
      • CASH FLOW 5
      • SALVAGE VAL
      LUMP $10,000 TABLE 2: 10% PRESENT VALUE -INVESTMENT NET PRESENT VALUE PRES VAL $9,315 0.909 0.826 0.751 0.683 $0 $0 $0 $0 $15,000 $0 $0 $0 $0 0.621 9,315 (685) -10,000
    • 13. B. NET PRESENT VAL CALCULATION
      • INVESTMENT
      • CASH FLOW 1
      • CASH FLOW 2
      • CASH FLOW 3
      • CASH FLOW 4
      • CASH FLOW 5
      • SALVAGE VAL
      LUMP $10,000 $0 $0 $0 $0 $15,000 PRESENT VALUE -INVESTMENT NET PRESENT VALUE CALCULATOR ENTER 1, PRESS + ENTER INT AS..XX PRESS = PRESS 2nd/SHIFT PRESS XY ENT YRS, PRESS =
    • 14.
      • INVESTMENT
      • CASH FLOW 1
      • CASH FLOW 2
      • CASH FLOW 3
      • CASH FLOW 4
      • CASH FLOW 5
      • SALVAGE VAL
      EQUAL $48,000 $10,000 $10,000 $10,000 $10,000 $10,000 TABLE 2: 10% PRESENT VALUE -INVESTMENT NET PRESENT VALUE PRES VAL 9,090 8,260 7,510 6,830 6,210 37900 $37,900 -$48,000 ($10,100) 0.621 [3.790] 0.683 0.751 0.826 0.909
    • 15.
      • INVESTMENT
      • CASH FLOW 1
      • CASH FLOW 2
      • CASH FLOW 3
      • CASH FLOW 4
      • CASH FLOW 5
      • SALVAGE VAL
      UNEQUAL $4,000 $2,000 $2,000 $3,000 TABLE 2: 10% 0.909 0.826 0.751 PRESENT VALUE -INVESTMENT NET PRESENT VALUE PRES VAL 1,818 1,652 2,253 5,723 $ 5,723 -$4,000 $1,723
    • 16. B. BENEFIT- COST CALCULATION
      • INVESTMENT
      • CASH FLOW 1
      • CASH FLOW 2
      • CASH FLOW 3
      • CASH FLOW 4
      • CASH FLOW 5
      • SALVAGE VAL
      LUMP $10,000 $0 $0 $0 $0 $15,000 EQUAL $48,000 $10,000 $10.000 $10,000 $10,000 $10,000 PRESENT VALUE INVESTMENT BENEFIT/COST = UNEQUAL $4,000 $2,000 $2,000 $3,000 9,315 10,000 37,900 48,000 5,723 4,000 1.43 .790 .932
    • 17.
      • 1. ADVANTAGES
      • a. CONSIDERS ALL CASH FLOWS
      • b. PROVIDES BASE FOR COMPARISON
      • 2. DISADVANTAGE
      • a. MOST COMPLEX
      • b. ASSUMES REINVESTMENT AT
      • INTERNAL RATE OF RETURN
      B. INTERNAL RATE OF RETURN
    • 18. 3. INTERNAL RATE OF RET
      • 1. USE PAYBACK PERIOD
      • 2. FIND APPROP ROW IN TABLE1
      • 3. GO ACROSS TO FIND PAYBACK
      • 4. READ UP TO FIND % RET
      LUMP 4.66 5 YR X.XX - XX.X 3 - 4 % EQUAL 4.8 5 YR X.XX - X.XX 3 - 4% UNEQUAL 2.0 5 YR X.XX - X.XX 3- 4%
    • 19. TIME SUMMARY
      • NET PRES VALUE
      • BENEFIT COST
      • INTERNAL
      • RATE
      LUMP EQUAL UNEQUAL $-685 $-10,100 $1,723 .932 .790 1.43 XX% % % WK 5: CAPITAL BUDGETS
    • 20. SUMMARY
      • 1. CAPITAL BUDGETING LOOKS AT THE PROFITABILITY OF LG. INVESTMENTS
      • 2. RESULTS OF “NON-TIME” METHODS ( PAYBACK, ACCT RATE OF RET, & BOOK RATE OF RETURN) CAN NOT BE COMPARED TO BANK RATES.
      • 3.RESULTS OF “TIME” METHODS (NET PRESENT VAL, BENEFIT-COST, & INTERNAL RATE OF RET) CAN BE COMPARED TO BANK RATES
      WK 5: CAPITAL BUDGETS
    • 21. ASSOCIATED LAB ACTIVITIES
      • CALCULATION OF INVESTMENT MEASURES
      • -- PAYBACK
      • -- ACCT RATE OF RETURN
      • -- BOOK RATE OF RETURN
      • -- NET PRESENT VALUE
      • -- BENEFIT/COST
      • -- INTERNAL RATE OF RET
      WK 5: CAPITAL BUDGETS
    • 22. SELF TEST
      • PRES VAL / INVESTMENT
      • BENEFIT- COST
      SIMPLEST METHOD BUDGET FOR BIG ITEMS QUANTATIVE BASIS NON-TIME METHOD W/O SALV COMPARED TO BANK RATES IMAGE, PRETIGE NON-TIME METHOD WITH SALV TIME TO RECOVER INVESTMENT PRES VAL - INVESTMENT PAYBACK CAPITAL “ WILL IT PAY” ACCT RATE TIME METHODS QUALITATIVE BASIS BOOK RATE PAYBACK NET PRES VAL
    • 23. EVALUATION
      • YOUR UNDERSTANDING OF THESE CAPITAL BUDGET CONCEPTS WILL EVALUATED ON THE MIDTERM TO BE GIVEN THE FIFTH FRIDAY OF THE QUARTER (THIS WEEK!!!!!!!!)
      WK 5: CAPITAL BUDGETS
    • 24. MIDTERM THIS FRIDAY !!!!!
      • PART 1: OBJECTIVE QUESTIONS (T/F, MC, ETC)
      • 10 PTS: WK 1- INTRODUCTION
      • 10 PTS: WK 2- ECONOMICS & RECORDS
      • 10 PTS: WK 3- BUDGETS (CASH, ENT, ETC)
      • 10 PTS: WK 4- LINEAR PROGRAMMING
      • 10 PTS: WK 5- CAPITAL BUDGETS
      • PART II. PROBLEMS
      • 20 PTS: ECONOMICS 5 PTS: BUDGETS
      • 18 PTS: LINEAR PROG 9 PTS: INVESTMENT
    • 25. NEXT TOPIC
      • TIMELINESS
      INTERNATIONAL HARVERSTER W4
    • 26. IV. TIME VALUE OF MONEY V. TIME METHODS A. NET PRESENT VALUE B. BENEFIT COST C. INTERNAL RATE OF RETURN

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