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  • 4
  • Transcript

    • 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: Estate Planning
    • 3. 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
    • 4. 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
    • 5.
      • C. Types Of Investment Choices
      2. Preference: Which Is Best 1. Screening: Which Are Good Wk 5: Capital Budgets
    • 6. D. Basis Of Decisions
      • A. Style, “Paint Color”
      • B. Prestige, Image
      A. Profitability B. Rate Of Return 2. Quantitative: “Will It Pay” 1. Qualitative: “ What I Want” Wk 5: Capital Budgets
    • 7. II. Capital Budget Steps
      • A. Determine Cost Of Capital
      • Aft Tx Rate: Int Rate*(1-tx Rate)
      • + Inflation Rate
      • + Risk Factor
      • = Cost Of Capital
      • B. Determine Initial Investment
      • C. Determine Net Cash Flows
      • Net Cash = Cash Rec- Cash Exp
      • D. Estimate Terminal Value
      • E. Calculate Investment Measures
      Wk 5: Capital Budgets
    • 8. III. Non-time Methods
      • A. Payback
      • 1. Advantages
      • A. Simple & Easy
      • B. Widely Used
      • C. Emphasizes Liquidity
      • 2. Disadvantages
      • A. Profitability Not Considered
      • B. Cash Flows After Payback
      • Are Ignored
      • C. Time Value Of Money Ignored
      WK 5: Capital Budgets
    • 9. 3. Pay Back Calculation
      • Investment
      • Cash Flow 1
      • Cash Flow 2
      • Cash Flow 3
      • Cash Flow 4
      • Cash Flow 5
      • Salvage Val
      • Tot Revenue
      • Profit
      • Payback
      Lump $10,000 $0 $0 $0 $0 $15,000 Equal $48,000 $ 10,000 $10,000 $10,000 $10,000 $10,000 Unequal $4,000 $2,000 $2,000 $3,000 $15,000 $50,000 $7000 $5,000 $2,000 $3,000 4.66 Yr 4.8 Yr 2.0 Yr $0 $0 $0 WK 5: Capital Budgets
    • 10.
      • B. Acct Rate Of Ret & Book Rate
      • 1. Advantages
      • A. Calculation Ease
      • B. Good For Screening
      • C. Gd For Short Life Projects
      • 2. Disadvantages
      • A. Time Val Of $ Not Considered
      • B. Doesn’t Consider The Timing
      • Of The Flows
      WK 5: Capital Budgets
    • 11. 3. Acct Rate Of Ret 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 Cash - Invest Time ========== > Investment 15,000 - 10,000 5 ========= > 10,000 5,000 5 ==== > 10,000 1000 ==== > 10,000 = 10% $0
    • 12.
      • Investment
      • Cash Flow 1
      • Cash Flow 2
      • Cash Flow 3
      • Cash Flow 4
      • Cash Flow 5
      • Salvage Val
      Equal Cash - Invest Time ========== > Investment 50,000 - 48,000 5 ========= > 48,000 2,000 5 ==== > 48,000 400 ==== > 48,000 = .8% $48,000 $10,000 $10,000 $10,000 $10,000 $10,000 $0 WK 5: Capital Budgets
    • 13.
      • Investment
      • Cash Flow 1
      • Cash Flow 2
      • Cash Flow 3
      • Cash Flow 4
      • Cash Flow 5
      • Salvage Val
      Unequal Cash - invest Time ========== > Investment 7,000 - 4,000 3 ========= > 4,000 3,000 3 ==== > 4,000 1,000 ==== > 4,000 = 25% $4,000 $2,000 $2,000 $3,000 $0 WK 5: Capital Budgets
    • 14. 4. Book Rate Of Ret Calculation
      • Investment
      • Cash Flow 1
      • Cash Flow 2
      • Cash Flow 3
      • Cash Flow 4
      • Cash Flow 5
      • Salvage Val
      Lump Cash - Invest No Of Flows Invest + Salv 2 15,000 - 10,000 5 ========= > 5,000 5,000 5 ==== > 5,000 1000 ==== > 5,000 = 20% $10,000 $0 $0 $0 $0 $15,000 $0
    • 15.
      • Investment
      • Cash Flow 1
      • Cash Flow 2
      • Cash Flow 3
      • Cash Flow 4
      • Cash Flow 5
      • Salvage Val
      Equal 50,000 - 48,000 5 ========= > 24,000 2,000 5 ==== > 24,000 400 ==== > 24,000 = 1.6% Cash - Invest No Of Flows ========================== Invest + Salv 2 48,000 10,000 10,000 10,000 10,000 10,000 $0 WK 5: Capital Budgets
    • 16.
      • Investment
      • Cash Flow 1
      • Cash Flow 2
      • Cash Flow 3
      • Cash Flow 4
      • Cash Flow 5
      • Salvage Val
      Unequal 7,000 - 4,000 3 ========= > 2,000 3,000 3 ==== > 2,000 1,000 ==== > 2,000 = 50% Cash - Invest No Of Flows ======================== Invest + Salv 2 $4,000 $2,000 $2,000 $3,000 $0 WK 5: Capital Budgets
    • 17. Non-time Summary
      • Tot Rev
      • Profit
      • Payback
      • Acct Rate
      • Book Rate
      Lump Equal Unequal $50,000 $20,000 $7,000 $5,000 $2,000 $3,000 4.66 Yr 4.8 Yr 2.0 Yr 10% .8% 25% 20% 1.6% 50% WK 5: Capital Budgets
    • 18. IV. Time Value Of Money A. Future Value WK 5: Capital Budgets 1 ...Of A Lump Sum ( Compounding) Looking Ahead 2 ...Of An Annuity (Regular Deposits) B. Present Value Looking Now 1 ...Of A Lump Sum ( Discounting) 2 ...Of An Annuity (Regular Deposits)
    • 19. 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 WK 5: Capital Budgets
    • 20. 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 WK 5: Capital Budgets
    • 21. 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 WK 5: Capital Budgets
    • 22. 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 WK 5: Capital Budgets
    • 23. 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 = WK 5: Capital Budgets
    • 24. 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
      WK 5: Capital Budgets
    • 25. 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
    • 26. 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 = WK 5: Capital Budgets
    • 27.
      • 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 WK 5: Capital Budgets
    • 28.
      • 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 WK 5: Capital Budgets
    • 29. 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
    • 30.
      • 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 WK 5: Capital Budgets
    • 31. 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.X - X.X% 3 - 4 % Equal 4.8 5 Yr X.X- X.X% 3 - 4% Unequal 2.0 5 Yr X.X - X.X% 3- 4% WK 5: Capital Budgets
    • 32. 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
    • 33. 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
    • 34. 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
    • 35. 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 WK 5: Capital Budgets
    • 36. 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
    • 37. 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
    • 38. NEXT TOPIC
      • TIMELINESS
      INTERNATIONAL HARVERSTER W4

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