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# Introduction to Farm and Ranch Management EconS 350

WSU

GPA 3.58

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This 62 page Class Notes was uploaded by Maurine Kuhic on Thursday September 17, 2015. The Class Notes belongs to EconS 350 at Washington State University taught by Staff in Fall. Since its upload, it has received 28 views. For similar materials see /class/205984/econs-350-washington-state-university in Economic Sciences at Washington State University.

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Date Created: 09/17/15

SOME BASIC ECONOMIC CONCEPTS CosT Concest CosT a charge ThaT should be made for an iTem used in The producTion of goods and services There are boTh cash and noncash cosTs MosT noncash cosTs are opporTuniTy cosT ToTal CosT is made up of Fixed CosTs and Variable CosTs TC TVC TFC Fixed cosTs are Those cosTs ThaT are incurred wheTher anyThing is produced or noT DepreciaTion InTeresT Taxes Insurance Variable cosTs are Those cosTs ThaT change wiTh The level of producTion Labor Herbicides Seed PesTicides FerTilizer Repair and MainTenance Fuel ETc WheTher a cosT is fixed or Variable depends on The decision To be ma e and The period of Time being considered When does a Variable cosT become a fixed cosT From The decision sTandpoinT The Variable cosTs are The mosT relevanT EXAMPLE Fixed cost 8000 Variable cost 15 000 Total cost 23 000 Expected yield 1000 units Expected price 30 per unit Do you produce Three Months Later Fixed cost 13000 Variable cost 10 000 Total cost 23 000 Expected yield 1000 units Expected price 15 per unit Do you continue to produce Three Months Later Fixed cost 13000 Variable cost 10 000 Total cost 23 000 Expected yield 1000 units Expected price 7 per unit Do you continue to produce ConcepT of Marginal Analysis PraducTian RelaTianships FacTars of PraducTian Land Labor Capital ManagemenT The manager musT allocaTe These scarce resourcesquot as economically as possible among compeTing enTerprises if heshe is To maximize profiT ProducTion funcTion describes The physical relaTionship beTween The quanTiTies of inpuTs facTors of producTion and The quanTiTies of oquuT producT ThaT sulT Y fgtlt1gtlt2gtlt3gtltn AVERAGE PHYSICAL PRODUCT an MARGINAL PHYSICAL PRODUCT BoTh concest are useful in undersTanding and usin producTion funcTion for decision making Average Physical ProducT TPPInpuT Level gs m y ngmpnw mam n EXAMPLE OF TYPICAL PRODUCTION FUNCTION 2n um u w mi Addwnnlanml myvnaugu om Physnuleduc EXAMPLE OF TYPICAL PRODUCTION FUNCTION 2n lb bugs 0 Taml mmi Ad I wanm mam 4 3 m in Tam Avlrugl vmmi om mam The Term marginal is synonymous wiTh The Term addiTional in economics and is The mosT powerful Tool in The science Marginal quanTiTies acTually refer To raTios of change or more precisely The increase or decrease aT The margin Marginal Physical ProducT is The incremenTal change in ToTal Physical Prod ucT as a resulT of a one uniT change in inpuT MPP A ToTal Physical ProducT A InpuT Level EXAMPLE OF TYPICAL PRODUCTION FUNCTION 2n lb bugs H mm mm mm In mu mg vmmi wapnm mam om mam n n v 1 v v nu m 2 17 7 5n 7 3 2x 733 x a CM 7 nn 7 5 43 x An A A 47 x n 5 7 54 771 5 x 57 73x EXAMPLE OF TYPICAL PRODUCTION FUNCTION 2n 7 mm Ta uIPhysicuI MmgmuIPhysicuI mg Wm wapnw mam mam mam n n v 1 v 7 an m 2 17 7 5n 7 3 2x 733 x a CM 7 an 7 5 43 x An A A 47 x n 5 7 54 771 5 x 57 73x EXAMPLE OF TYPICAL PRODUCTION FUNCTION 2n 7 mm Ta uIPhysicuI Wm mu Mg Wm wapnw mam mm mm 57 73x 4 7 3 7w 3 m u A An 2 11 AK A m 1 12 AV 575 5 13 AV 5 535 5 m 7n 5 an 1 15 AV 4 An Marginal Physical ProducT is The incremenTaI change in ToTaI Physical Prod ucT as a resuIT of a one uniT change in inpuT MPP A ToTaI Physical ProducT A InpuT Level Law of diminishing marginal reTurns as addiTionaI uniTs of a Variable inpuT are used in combinaTion wiTh one or more fixed inpuTs marginal physical producT will evenTuaIIy begin To decline Three properTies of This law and iTs definiTion need To be emphasized e or more fixed inpuTs musT be used in The producTion process in addiTion To The variable inpuT The definiTion does noT preclude diminishing marginal reTurns from beginning wiTh The firsT uniT of The variable inpuT This law is based on The biological processes found in agricuITuraI producTion cHoosiNG LEVEL OF iNF UT USEiNET RETURN APPROACH uumm punnun PuucuuWimn 2 sum 2n n nugsuu Nmagln pquot mu Physical mu nun um mm mm mm cm Nu mums 3 n n n nn n n nn 1 u 22 an 4 1n 5n 2 1u mu u 3v 5n 3 2n 7n nn 12 an nn 4 an un nn 1n n nn 5 43 1n7 5n 2n 37 an n nu 122 an 24 uu 5n 7 an 135 nn 2n 1n7 nn u su 147 an 32 115 an u n 157 an an 121sn 2n n nuns u Nihagln p mu unmuu mu nun um mm mm Tami ans Nu mums 1n nn 1nsnn 4n 12snn 11 nu 17n nn M 12n nn 12 nu 172 an an 124 an 13 nus 1 75 52 14 7n 175nn 5n 11unn 15 nu 1725n nn 112sn Whm 15m mun nunum 3n nnnugu Marginal analysis is used To compare The cosT of The variable inpuT wiTh The markeT price of The producT in order To deTerrnine The mosT profiTable level of an inpuT To use ProfiTs are increased whenever The increase in The ToTal value of The producT resulTing from a oneuniT increase in The variable inpuT is greaTer Than The added cosT of using an addiTional uniT of inpuT TPP ToTal Physical ProducT MPP Marginal Physical ProducT added yield MVP Marginal Value ProducT MPP x ProducT Price MVP Marginal Value ProducT MPP x ProducT Price Book definiTion The addiTional marginal income received from using an addiTional uniT of inpuT MVP A ToTal Value ProducT vel We are changing The inpuT level by one uniT aT a Time MIC Marginal InpuT CosT CosT of InpuT UniT Book definiTion The change in ToTal inpuT cosT or The addiTion To ToTal inpuT cosT caused by using an addiTional uniT of inpuT MIC A ToTal InEuT CosT A InpuT Level MosT profiTable level of inpuT is where MVP MIC CHOOSiNG LEVEL OF iNF UT USEiMARGiNAL APPROACH MVP Mlc APPROACH 2o lb logs w M w Noam on we we omen l log newoog wenlog v2swov soon11 o o s z z 1 v v 4 an o W 22 5n 21 an 2 1i 1o no no 2soo won 3 2o v no no 22so soon 4 21 o 4 an 2o an 32 an 5 43 7 no no 1m 2m 1 4v 1 4 an 15 an 24 an 7 54 5 no no 12 En 2m x at 5 no no 12so 2ooo v 12 o 4 an o W 1o nn 1 an 1o 11 3 no no no 12oo 2o lb logs p M W n Nilngm on we we omen to log newoog Ne smog v2swov soon11 z z 3 1t 1o 2 4 an o W 5 an o W 12 1v 1 4 an o W 2 5n 4 an 13 1v 5 5 4 an o an 125 2 an 14 7o 5 o nu o an 125 2 an 1 we a Imile mg a Imile mtg m a union smog pnsunmilnnleoog pimtsomzoooov uogsonmilmivsw Equal Marginal Principle What if you donquott have enough of an input To apply The profitmaximizing A limited input should be allocated among alternative uses so That The marginal value products are equal Marginal Analysis Problem You overhear the following conversation between an apple producer and a WSU extension agen Extension Agent You should spend more t me pruning your apple treesquot Producer I cannot afford to pay for more pruning laborquot Extension Agent If you spent 20 minutes more time pruning each apple tree how many more boxes of ash ngton Extra Fancy Red Delicious apples would you t7 Producer I est mate about two boxes per treequot Assume Pruning labor costs 12 per hour The cssumed price received by the producer is 14 per box for Washington Extra Fancy Red Del cious apples and 8 per box for us Fancy Red Delicious Apples For each box of Wash ngton Extra Fancy apples gained box of v5 Fancy apples is lost Knowing the above would it be economically viable for the producer to increase his pruning time by 20 minutes per tree Prove your answer by using marginal concepts to calculate now much money the producer would lose or gain per tree if the prun ng time per tree is increased 20 minutes lllarginal Input Cost 400 Value of Marginal Product 600 X 2 b xes 12 A er showing The above resulTs To The producer The producer says I Think The price of WashingTon ExTra Fancy apples is more like 12 per box The price of U S Fancy apples is okay aT 8 per box quot Would iT be economically viable for The producer To increase his pruning Time by 20 minuTes per Tree Prove your answer using marginal concest Marginal InpuT CosT 400 Value of Marginal ProducT 400 X 2 boxes 8 ThaT39s Alli FINANCE A Microcomputer Program to Analyze Potential Agricultural Investments A sound investment must satisfy three criteria 1 It must be profitable 2 The cash flow must be financially feasible 3 The E must be compatible with the preferences and financial position of the investor PROFITABILITY is determined by discounted aftertax cash flow techniques net presentvalue internal rate of return realizable rate of return CASH FLOW PERFORMANCE is assessed by the projected annual cash flows comparing the time period required to recover the investment with the asset s expected useful life comparing the time required to recover the debt with the loan repayment penod RISK is analyzed by changing major but uncertain assumptions and recalculating to determine the impact on investment profitability and cash flow BALE WAGON INVESTMENT PROBLEM 1 Joe Farmer has been customhiring the hauling of his hay from the field too Ihis hay shed at a cost of 35 per a e He has typically been producing approximately 40000 bales per yeah 3 Joe is considering the purchase of a used selfpropelled bale wagon at a price of 40000 a He will keep the bale wagon ten years at which time it will have a salvage value of 10000 b He will depreciate the bale wagon over a sevenyear period using ACRS accelerated depreciation C d The expensing option will not be exercised Joe will hire a person to operate the bale wagon at a cost of 10 per hour Joe calculates that the person running the bale wagon averages 200 bales per hour of actual operation For every hour of machine operation Joe calculates an additional 25 labor hours for maintenance repair and moving time 9 h J k The cost of operation averages 600 per hour for fuel and 900 per hour for repair and maintenance In addition taxes insurance and housing for this machine averages 1500 per year Joe is in the 15 percent marginal income tax bracket To purchase this machine Joe will pay 10000 as a down payment with the remainder to be paid off in five annual payments at 8 percent interest Joe calculates his return from any alternative investment to equal the loan interest rate of 8 percent We lccme Finance A Prcgram tc Analyze Investments in Agricultural Cactial Assets We nmc39rrjc Sim 2r warm 11 UNwI1I41Hrrt Copyright Washington State University This prdduct is protected by US Copyright laws as described in the I39i tbcut EiIZIH Press any key tc ccntinue r 51 Finance E Eile Bun Exit F1 Help Data Investment T Annual Annual Identification Detail Revenues Expenses I Taxp ates I LuanDeta39l Name Farm 1 Ranch Management Data imznns Prehlemldentificatien lEgalewagUn y El Finance Q1 Eile gun Egit F1 Help Data Investment V Annual Annual Identification Detail I Revenues I Expenses I Tax Rates T man Dataquot Amount of Initial Investment Years otUsetul Life Years Terminal Value oflnvestment Expensing Option Tax Deduction Depreciation Method IACCElerated Depreciation Life 1 7 years 1 I years Percent of Total Investment Eligible 3 years Disregard Expensing Option Tax E 5 years inseam 1 years 15 years 2 years EL Finance QW Eile Bun Ezit Fl Help Data Investment 1 Annual Annual Identification Detail I Revenues I Expenses I Tax Rates I ma Dataquot Amount of Initial Investment lawnm Years osteful Life Years Terminal Value oflnveetment Expeneing Option Tax Deduction Depreciation Method laggemrated Depreciation Life years 4 Percent ofTotal InvestmentEligibleforDepreciation 11m Disregard Expensing Dption Tax Deductions El Finance lEl1 Eile Bun Egit F1 Hep Data I Investment I Annual Annual Identification Detail Revenues Expenses l T R tBS l LDanDBtall Selectthe method for recording estimated annual revenue forthe investment 3 Constant yearly revenues stant yearly revenues Annual percentage increasing decreasing revenues Year by year revenues F Revenue Per fear 1qnnnnn UK Revenue peryear Cancel r 3933 Finance Eile Bun Egit F1 Help Data Investment Annual Annual Identification I Detail I Reyenues I Expenses I Tax Rates I Loan Data Selectthe method for recording estimated annual expenses forthe inyestment 3 Constant yearly expenses stant yearly expense 3 Annual percentage increasing decreasing expenses Year by year expenses Expenses per year llljlnlln Expense peryear UK I Cancel I r Blij EELFinance Eile Bun Egit FlHelp Data Investment Annual Annual IdentificatienI Detail I Revenues I EwenBBS I T XR tes LeanDetall Seleetthe methed fer reeerding estimated annual marginal tax rate Constant yearly Marginal Tax Rate Qggtant ye arly Marginal Tax Rate Ye ar by year Marginal Tax Ftate Marginal Tax Rate Percent Change MarginalTaxRata peryear I15IUD quotii Capital Gain Plate 391 11m 31 El K I Cancel I r El Finance QIE Eile Bun Exit F1 Help Inyestment Data Identification Detail Annual Expenses Annual Revenues I TaxRates I Loan Detail BeforeTax Discount Rate AmountofDown Payment Manna Loan Interest Rate Repayment Period Begin Repayment Year Loan Type Annual Payment Balloon Payment 3 96 lg Ye anjsj It P3 Dalculated No Balloon PM Calculated No Balloon Annual Payment Balloon Calculated Balloon Payment Pal Calculated 11 E l Finance QIE Eile Bun Exit F1 Help Data Identification lnve etment Detail Annual Annual Revenues Expenses l Tax Rates Loan Type Lo an lntereet Rate Repayment Period Annual Payment Eialloon Payment BeforeTax DieoountFtate 73 96 Amount ofDown Payment lmnnn 7 5 94 lg Ye aria Begin Repayment Year Pril Calculated No Balloon l513i39 ll Beforetax income vs Aftertax income Beforetax net cash flow vs Aftertax net cash flow Marginal Tax Rate 25 1000 before taxes x 1 25 750 after taxes Income tax savings Marginal Tax Rate 25 1000 expense really only costs 750 By having the 1000 expense you do not have to pay 250 income tax on the 1000 that would have othenNise been classified as income 250 income tax savings Beforetax and aftertax discount rates Marginal Tax Rate 25 If your beforetax discount rate is 12 but your cash flow is in aftertax dollars your aftertax discount rate is 12 x 1 25 900 Real vs nominal interest rates 8 nominal interest 3 inflation 5 real interest B View Output Lquot FINANCE Name Farm amp Ranch Management Date EDT2005 Problem Id Balewagon r I HPUT Initial Investment 5 40000 00 Useful Li e 10 years Terminal Value 3 1000000 Depreciation Life years Depreciation Type ACCELERATED Amount Expensed S 000 Percent Available for Deprec 10000 K Annual Revenues S 1400000 Annual Expenses 8 00000 Marginal Income Tax Rate 15 00 X Capital Gain Tax Rate 1000 2 Before Tax Discount Rate 300 2 After Tax Discount Rate 680 X Amount of Down Payment 3 1000000 Amount of Debt Financing 9 3000000 Loan Interest Rate 800 X Loan Repayment Period 5 years Principal Repayment Begins Year Annual PampI Payment 3 51369 Balloon Payment 5 001 Final Payment With Balloon 3 513 0 lgl i iie rdutipiutii i V 77777 7 Id PROFITABILITY MEASURES Net Present Value the After Tax Discount Rate 8 1120049 IHI Annual Equivalent of Net Present value 3 15999 After Tax Internal Rate of Return 1639 X After Tax Realizahle Rate of Return 1513 X LIQUIDITY MEASURES n tment Payback Period 68 years Debt Recovery Period 538 years El View Outpilt LJLEJEI LOAN SCHEDULE Interest Principal Total Principal Year Payment Payment Payment Balance 0 000 00 000 3000000 1 240000 5113 69 51369 2488631 2 1990 90 5 522 9 513 69 19363 52 3 154908 5 964 61 51369 13398 91 4 10191 64418 751369 6 95 13 5 556 5 6 9513 5130 000 Total 56B46 30 000 00 356346 000 IAI lgl El View Output IA PERIODIC NET INCOME CALCULATIONS T Operating Amount Depre Year Reoeipte Costs Expeneed eiation l 1400000 T00000 000 428400 2 1400000 T 000 00 000 T65200 3 14000 00 T 000 00 000 601200 4 14 00000 T 000 00 000 4900 00 5 14 00000 T 00000 000 490000 6 14 000 00 T 00000 000 490000 T 14 000 00 T 000 00 000 490000 8 14 00000 T 000 00 000 245200 9 14 000 00 T 000 00 000 000 10 1400000 T00000 000 000 Total 14000000 T000000 000 40 000 00 PERIODIC NET INCOME CALCULATIONS CONTI NUED Capital Depre Net Income Tear Interest Gains Reeapture Before Tax 1 2 400 00 000 000 31600 2 1 99090 000 000 264290 3 1 54908 000 000 56108 4 1 0T1 91 000 000 102809 5 5565T 000 000 154343 6 000 000 000 210000 T 000 000 000 210000 8 000 000 000 4548 00 9 000 000 000 T00000 10 000 000 1000000 1700000 Total T56846 000 1000000 3243154 I lynl Eli View Output Igl PERIODIC NET INCOME CALCULATIONS ONTINUED C Income Capital Net Income Year Tax Gains Tax After Taxes 1 440 000 26860 2 39644 000 224646 3 8416 000 4692 4 154 21 000 B3 88 5 23151 000 1311 92 6 315 00 000 18500 T 315 00 000 18500 8 682 20 000 386580 9 105000 000 5950 00 10 255000 000 1445000 Total 48642 000 2756682 IHI El 1u39iew Output HEW PERIODIC AFTER TAX NET CASH INFLOU Down Opera t i ng I ncome Year Payment Receipts ax 0 1000000 000 000 000 1 000 14 00000 395quot00000 440 2 0 00 14 00000 00000 39644 3 0 00 14 00000 3900000 8416 4 0 00 14 00000 397quot00000 15421 5 0 00 14 00000 00000 23151 6 000 14 00000 200000 31500 7quot 000 14 00000 1700000 31500 8 000 14 00000 395 00000 68220 9 El 00 14 00000 00000 105000 10 000 1400000 3900000 255000 Total 1000000 14000000 000000 48642 I PERIODIC AFTER TAX NET CASH INFLOIJ CONTINUED Terminal Capital Annual Net Cash Year a we aims Tax Payment Inf low 0 000 000 000 1000000 1 000 000 3751369 56109 2 000 000 751369 1125 3 000 000 251369 42953 4 000 000 51369 6690 5 000 000 5130 4521 6 000 000 000 668500 395 000 000 000 668500 8 000 000 000 63180 9 000 000 000 595000 10 1000000 000 000 1445000 Total 1000000 000 356846 2566 82 lgl 131 View Graph 1500 AFTERTAX NET CASH FLOW 1000 Han c n 3mm X D 500 1000 1500 1000 500 500 Years of Inves tmen t Life 1 000 AfterTax Net Present Value Calculation for the Potential Bale Wagon Investment Net Annual AfterTax Discount Present Cash Inflow Rate 681 Value 0 1000000 1000 1000000 1 56109 1068 52537 2 11725 10682 10279 3 42953 10683 35260 4 66790 10684 51337 5 74521 10685 53632 6 668500 10686 450478 7 668500 10687 421796 8 631780 10688 373247 9 595000 10689 329136 10 1445000 106810 748437 Net Present Value 1120049 1 Example assumes an 8 beforetax discount rate Aftertax discount rate 8 X 1 15 68 2Year 0 represents the present 3 10000 is the amount initially invested Net Present Value 1120049 Interpretation Net Present Value 0 investment returning exactly a 68 aftertax return Net Present Value gt 0 investment returning more than a 68 aftertax return Net Present Value lt 0 investment returning less than a 68 aftertax return In example over a 10year period making 1120049 more than a 68 aftertax return Internal Rate of Return What is the rate of return on this investment The rate of interest that brings the Net Present Value to zero Net Present Value Calculation for the Potential Bale Wagon Investment at 16 Discount Rate Net Annual AfterTax Discount Present Cash Inflow Rate 161 Value 0 1000000 100 1000000 1 56109 116 48370 2 11725 1162 8714 3 42953 1163 25718 4 66790 1164 36888 5 74521 1165 35480 6 668500 1166 274381 7 668500 1167 236535 8 631780 1168 192709 9 595000 1169 156457 10 1445000 11610 327558 Net Present Value 32470 Net Present Value Calculation for the Potential Bale Wagon Investment at 17 Discount Rate Net Annual AfterTax Discount Present Cash Inflow Rate 171 Value 0 1000000 100 1000000 1 56109 117 47956 2 11725 1172 8565 3 42953 1173 26819 4 667 90 1174 35643 5 74521 1175 33990 6 668500 1176 260607 7 668500 1177 222741 8 631780 1178 179920 9 595000 1179 144825 10 1445000 11710 300614 Net Present Value 44266 R R 0 Z 0 Internal ate Of eturn 0 0 ESL View Output FINANCE Name Farm amp Ranch Management Date 2005 Problem Id Balewagon INPUT Initial Investment 3 40000 00 Useful Life 10 years Terminal alue 9 1000000 Depreciation Iife years Depreciation Type ACCELERATED Amount Expense S 000 Percent Available for Deprec 10000 X Annual Revenues S 1400000 Annual Expenses 3 00000 Marginal Income Tax Rate 1500 X Capital Gain Tax Rate 1000 2 Before Tax Discount Rate 1930 X After Tax Discount Rate 1640 X Amount of Down Payment 1000000 Amount of Debt Financing 8 3000000 Loan Interest Rate 300 2 Loan Repayment Period 5 years Principal Repayment Begins Year 1 Annual PampI Payment 3 51369 Balloon Payment 3 001 Final Payment With Balloon 3 51370 Izl E Viww Output HEW I11 PROFITABILITY MEASURES Net Present Value the After Tax Discount Rate 3 043 Annual Equivalent of Net Present Value 009 IHI After Tax Internal Rate urn 16 39 2 After Tax Realizable Rate of Return 1640 X LIQUIDITY MEASURES nveetment Payback Period 68 years Debt Recovery Period 538 years The FINANCE program calculates the Internal Rate of Return on the amount of Equity own money invested Example 50000 investment returns 7500 per year Situation 1 Entire purchase of investment financed with Equity Capital 50000 of your own money Percent Return to Equity Capital IRR 7500 50000 x 100 15 Situation 2 Purchase investment with 10000 Equity Capital and a 40000 loan on which a 10 interest is being charged Return to Investment 7500 Interest Paid on Loan 4000 Return to Equity Capital 3500 Percent Return to Equity Capital IRR 3500 10000 x 100 35 Realizable Rate of Return nterna Rate of Return makes the assumption that excess cash generated by the investment is reinvested at the same rate of return the investment is returning Example return is 1639 Realizable Rate of Return and the Net Present Value makes the assumption that excess cash generated by the investment is reinvested in the next best alternative ie at the discount rate Example discount rate is 68 Thus in our example the realizable rate of return is less than the internal rate of return because while the investment is returning 1639 the IRR the excess cash generated from this investment is returning 68 The REALIZABLE RATE OF RETURN for the example is 1513 Annual Equivalent of Net Present Value Annual Equivalent of Net Present Value is the average annual amount that when discounted gives the same net present value as the investments net cash flow stream In this example the ANNUAL EQUIVALENT OF NET PRESENT VALUE is 157999 Present AN EQ Discount Value Year 1 157999 1068 147939 Year2 157999 10682 138520 Year 3 157999 10683 129700 Year4 157999 10684 121442 Year5 157999 10685 113710 Year 6 157999 10686 106470 Year 7 157999 10687 99691 Year 8 157999 10688 93344 Year 9 157999 10689 87400 Year 10 157999 106810 81836 Total 1579990 1120052 When comparing two investments with two different life periods one must compare he the annual equivalents and NOT the present values Net Cash Inflow including payments on principal Year 0 1000000 Year 1 455260 Year 2 540554 Year 3 553508 Year 4 577388 Year 5 621192 Year 6 668500 Year 7 668500 Year 8 631780 Year 9 595000 Year 10 1445000 Investment Payback Period Cash Inflow including Principal Payments Balance Initial Investment 4000000 Year 1 455260 3544740 Year 2 540554 3004186 Year 3 553508 2450678 Year 4 577388 1873290 Year 5 621192 1252098 Year 6 668500 583598 Year 7 668500 Investment Payback Period 583598 6 years 668500 2 687 years Debt Payback Period Cash Inflow including Principal Payments Balance Initial Loan Amount 3000000 Year 1 455260 2544740 Year 2 540554 2004186 Year 3 553508 1450678 Year 4 577388 873290 Year 5 621192 252098 Year 6 668500 Debt Payback Period 252098 5 years 668500 2 538 years B View Output Lquot FINANCE Name Farm amp Ranch Management Date EDT2005 Problem Id Balewagon r I HPUT Initial Investment 5 40000 00 Useful Li e 10 years Terminal Value 3 1000000 Depreciation Life years Depreciation Type ACCELERATED Amount Expensed S 000 Percent Available for Deprec 10000 K Annual Revenues S 1400000 Annual Expenses 8 00000 Marginal Income Tax Rate 15 00 X Capital Gain Tax Rate 1000 2 Before Tax Discount Rate 300 2 After Tax Discount Rate 680 X Amount of Down Payment 3 1000000 Amount of Debt Financing 9 3000000 Loan Interest Rate 800 X Loan Repayment Period 5 years Principal Repayment Begins Year Annual PampI Payment 3 51369 Balloon Payment 5 001 Final Payment With Balloon 3 513 0 lgl i iie rdutipiutii i V 77777 7 Id PROFITABILITY MEASURES Net Present Value the After Tax Discount Rate 8 1120049 IHI Annual Equivalent of Net Present value 3 15999 After Tax Internal Rate of Return 1639 X After Tax Realizahle Rate of Return 1513 X LIQUIDITY MEASURES n tment Payback Period 68 years Debt Recovery Period 538 years El 1u39iew Output HEW PERIODIC AFTER TAX NET CASH INFLOU Down Opera t i ng I ncome Year Payment Receipts ax 0 1000000 000 000 000 1 000 14 00000 395quot00000 440 2 0 00 14 00000 00000 39644 3 0 00 14 00000 3900000 8416 4 0 00 14 00000 397quot00000 15421 5 0 00 14 00000 00000 23151 6 000 14 00000 200000 31500 7quot 000 14 00000 1700000 31500 8 000 14 00000 395 00000 68220 9 El 00 14 00000 00000 105000 10 000 1400000 3900000 255000 Total 1000000 14000000 000000 48642 I PERIODIC AFTER TAX NET CASH INFLOIJ CONTINUED Terminal Capital Annual Net Cash Year a we aims Tax Payment Inf low 0 000 000 000 1000000 1 000 000 3751369 56109 2 000 000 751369 1125 3 000 000 251369 42953 4 000 000 51369 6690 5 000 000 5130 4521 6 000 000 000 668500 395 000 000 000 668500 8 000 000 000 63180 9 000 000 000 595000 10 1000000 000 000 1445000 Total 1000000 000 356846 2566 82 lgl That s All

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