capital investement

8/9/2019 capital investement

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CAPITAL INVESTMENT ANALYSIS

Donald W. Lybecker and Karen L. Holman

Department of Agricultural & Natural Resource Economics

olorado !tate "ni#ersity$ %ort ollins$ '()*+$ ,uly -'/

0odified for Windo1s !preads2eets by Duane 3riffit2

E4tension %arm 0anagement !pecialist

0ontana !tate "ni#ersity$ December -)

!ee 0acros 5age 6ab for A#ailable 0acros

62is template analy7es t2e profitability of a capital in#estment

using Net 5resent 8alue 9N58: and ;nternal Rate of Return 9;RR:. !ince

not all profitable in#estments are financially feasible$ t2e template

also e#aluates t2e financial feasibility of t2e in#estment from a cas2

flo1 standpoint. 62e template e#aluates assets 1it2 a useful life of up

to *( years. ;t uses 0AR! depreciation and loan amorti7ation 1it2

single annual payments.

Profitability:

A profitable in#estment 1ill 2a#e a positi#e N58. ;RR indicates

t2e rate of return earned by t2is in#estment. 5rofitability is calculated

as total receipts less e4penses less income ta4$ discounted to t2e

present using t2e 1eig2ted cost of capital. !imply stated$ it means

t2at o#er time receipts e4ceed e4penses in todayefore undertaking t2e in#estment$ t2e operator s2ould

reasonably certain 2e can make up any negati#e cas2 flo1s from ot2er

sources.

Net present #alue is calculated using t2e 1eig2ted cost of capital?

t2at is$ a 1eig2ted a#erage of t2e after@ta4 loan rate on borro1ed capital

and t2e opportunity cost on euity capital.

as2 income and cas2 e4penses are bot2 multiplied by t2e e4pected

inflation rate for eac2 year. ;ncome ta4 is computed as total receipts

@ total e4penses @ depreciation B t2e marginal ta4 rate.

Depreciation is computed by t2e appropriate 0AR! met2od. Due to

distortions in2erent in t2e declining balance met2od$ t2e last year of

depreciation may be 2ig2er t2an t2e pre#ious year.

;t is assumed t2at t2e asset is sold for Csal#age #alueC at t2e

end of t2e asset


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Any loan on t2e in#estment is amorti7ed by eual annual payments.

6a4 sa#ings from interest payments are computed as interest paid B ta4

rate and deducted from t2e total payment to gi#e an after@ta4 payment.

62is is deducted from net receipts to compute net cas2 flo1.

62e template is designed to analy7e an asset 1it2 a useful life of* to *( years. 62e reco#ery period is associated only 1it2 asset depreciation

for ta4 purposes$ and may 1ell be different from t2e asset life.

Ho1e#er$ t2e more closely t2e reco#ery period 9ta4 depreciation: and

useful life 9management depreciation: matc2$ t2e more accurate t2e

analysis.

!ome in#estments may s2o1 a Cnegati#eC income ta4. 62e template

assumes t2at t2is ta4 sa#ings can be used 1it2in t2e business to reduce

t2e o#erall ta4 liability. 62is assumption may not apply to all farms.

Input Item Input Definitions

Name 9tractor$ combine$ etc.: Descripti#e name for item being analy7ed5urc2ase 5rice 6otal price paid$ cas2 loan

!al#age 8alue Estimated sale #alue at end of analysis period

Reco#ery 5eriod 9+$)$/$-)$*( yrs: 6a4 life 90AR!: of asset

Asset Life 9*@*( yrs: E4pected useful life of asset? or lengt2 of analysis

E4pensing 9F-($((( ma4imum: Dollars of in#estment claimed as current e4pense

;ncome 6a4 Rate 0arginal income ta4 rate 9rate on last dollar earned:

5ercent %inanced by Loan 5ortion of purc2ase price t2at is borro1ed

Loan ;nterest Rate Annual interest rate c2arged on t2is loan

Loan Lengt2 9years: 6erm of loan in years

pportunity ost Rate euity capital could earn if in#ested else12ere

as2 ;ncome 3ross income e4pected from in#estment in first year

as2 E4penses as2 costs incurred by in#estment in first year ;nflation Rate E4pected inflation rate for income & e4penses

Note Enter percents as decimals 9e.g.$ .*'$ not *':.

TEMPLATE OPERATIONS

peration of t2is template under Windo1s$ is significantly different t2an

operation under t2e old D! #ersion. 62e program 2as been di#ided into

pages 1it2 eac2 page representing a portion of t2e input or results. 62e screen

1ill s2o1 page tabs t2at contain t2e -: ;nstructions$ *: ;nput$ +: N58 Results$

and G: t2e profitability and financial feasibility results. 62e input page also

contains se#eral intermediate calculations displayed or used in t2e results inot2er locations.

6o mo#e around and input data or #ie1 results$ click on t2e page tab at t2e

bottom or top of t2e screen 9depends on 12at 1indo1s spreads2eet you are

using:.

ERROR MESSAES


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;nput Errors

62e template c2ecks for certain error conditions during data entry.

!uc2 error conditions include assets 1it2 a life ot2er t2an +$ )$ /$ -)

or *( years? sal#age #alue purc2ase price? loan purc2ase price? etc.

Read any error messages or comments displayed by t2e template.

!elect ;N5"6 and c2ange your data if necessary. Iou may c2oose to ignore

t2e message if t2e data is correct for your particular analysis.

TEMPLATE LA!O"T

D"0EN6A6;N Description 5age 6ab 9Ro1s - t2roug2 -*':

;N5"6! 5rogram 5age 6ab 9ell block -G t2roug2 */:

RE!"L6! 5rogram 5age 6ab 9ell block ,- t2roug2 AE+G:

5rofitability Results 9ell block ,- t2roug2 AE-/:

%inancial %easibility Results 9ell block ,- t2roug2 AE+G:

00EN6!JERRR! 5rogram 5age 6ab 9ell block AH t2roug2 AK-/:LAN A0R6;A6;N 5rogram 5age 6ab 9ell block AH** t2roug2 AKG:

DE5RE;A6;N 5rogram 5age 6ab 9ell block A- t2roug2 >0-*:


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CAPITAL INVESTMENT ANALYSIS

alculations$ 5rofitability and %inancial %easiblity Analysis

Donald W. Lybecker and Karen L. Holman

Department of Agricultural & Natural Resource Economics

olorado !tate "ni#ersity$ %ort ollins$ '()*+$ ,uly -'/

0odified for Windo1s !preads2eets by Duane 3riffit2

E4tension %arm 0anagement !pecialist

0ontana !tate "ni#ersity$ December -)

T#e $ouble line$ bo% belo& is t#e ONL! input re'uire$ for t#is pro(ram)Inputs for Analysis: *omments+Error Messa(es

Name 9tractor$ combine$ etc.: *#opper

5urc2ase 5rice ,-./000

!al#age 8alue ,-/000 (

Reco#ery 5eriod 9+$)$/$-)$*( yrs: 1 (

Asset Life 9*@*( yrs: 20 (E4pensing 9F-($((( ma4imum: ,0 (

;ncome 6a4 Rate -3)004 (

5ercent %inanced by Loan 15)004 (

Loan ;nterest Rate 6)004 (

Loan Lengt2 9years: 5 (

pportunity ost 7)004 (

as2 ;ncome ,0 (

as2 E4penses ,2/-.0 (

;nflation Rate 5)004 (

Results an$ Interpretation for NP8 an$ IRR)

Net 5resent 8alue 9N58:@@@@@@@@@@@@@@@@@@@@@@@@@@@@ 9F*)$)/'.(:

;nternal Rate of Return 9;RR:@@@@@@@@@@@@@@@@@@@@@@ Err)*+

;f N58 is positi#e$ t2e in#estment is profitable if you are analy7ing an

in#estment t2at generates an identifable cas2 inflo1. ;f you are analy7ing

and in#estment t2at 2as only cas2 outflo1s associated 1it2 it$ 9%uel$ oil$

repairs$ ta4es$ etc.: t2en t2e N58 1ill al1ays be negati#e. ;n t2is case$ alternati#e in#estments are c2oosen by selecting t2e smallest

negati#e number.

;RR is t2e rate actually being earned on t2e in#estment

under t2ese input assumptions. 5lease note 2o1e#er$ t2at t2e ;RR is

not a CreliableC measure. ;t often produces inaccurate results and may display

Err or MN"0.


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G ) O / ' -( --

( ( ( ( ( ( ( (

( ( ( ( ( ( *$((( (

( ( ( ( ( ( *$((( (

-$G+) -$)(/ -$)'+ -$OO* -$/G) -$'+* -$*G (

@-$-(* @** @'(( @-$+)' @G' @)-+ *- (

++G )') /'* +(G -$*)O -$+- -$G) (

@++G @)') @/'* @+(G @-$*)O @-$+- )) (


G ) O / ' -( --

@++G @)') @/'* @+(G @-$*)O @-$+- )) (

+$') G$*GO ( ( ( ( ( (

/++ +'* ( ( ( ( ( (

G$O*' G$O*' ( ( ( ( ( (

*() -(/ ( ( ( ( ( (G$G*+ G$)*- ( ( ( ( ( (

@G$/)O @)$-(O @/'* @+(G @-$*)O @-$+- )) (

Financial Feasibility:

62e second part of t2e an

ment generates a negati#e ca

is ad=usted for principal and i

due to interest. >efore underreasonably certain 2e can ma

sources.


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( ( ( ( ( ( ( (( ( ( ( ( ( ( (

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lysis s2o1s in 12ic2 years t2is in#est@

2 flo1. 62e net return calculated abo#e

nterest payments$ less any ta4 sa#ings

aking t2e in#estment$ t2e operator s2oulde up any negati#e cas2 flo1s from ot2er


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WE;3H6ED !6

Iear WE;3H6ED !

*(

(

(

(

00EN6! AND E

( @

( !8 5urc2ase 5rice

( Not a Reco#ery 5erio

Life not in Range

( E4ceeds E4pensing

6a4 Rate G(P

Loan 5urc2ase 5ric

Asset Life Q Reco#er

Iear

*( LAN A0R6;A6;

(

( Iear

(

( -

*

( +( G

)

( O

/

'

-(

--

-*

-+

-G

-)-O

-/

-'

-

*(


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% AL"LA6;N Depreciation

% A5;6AL O.+OP

Reco#ery Iear

5eriod -

+ (

) (

/ O$')/

RR 0E!!A3E! -) (

@ @ *( (

;nterest +(P

d Loan Lengt2 *( yrs 6otal O$')/

pportunity ost +(P

a4 ;ncome 5urc2ase 5rice

E4p. 5urc2ase 5rice

e ;nflation Rate +(P

5d Loan life Asset Life

N AL"LA6;N!

5ayment G$O*'

Rem. >alance ;nterest 5rincipal

-'$((( -$O*( +$(('

-G$* -$+G +$*/'

--$/-G -$()G +$)/+'$-G- /++ +$')

G$*GO +'* G$*GO

( ( (

( ( (

( ( (

( ( (

( ( (

( ( (

( ( (

( ( (

( ( (

( ( (( ( (

( ( (

( ( (

( ( (

( ( (

6otal 5rincipal Repaid@@@@@@@@ -'$(((


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* + G ) O / ' -(

( (

( ( ( (

G$'' +$G *$G -$/') -$*/) +$-'/

( ( ( ( ( ( ( ( (

( ( ( ( ( ( ( ( (

G$'' +$G *$G -$/') -$*/) +$-'/ ( ( (


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Iear Iear Iear Iear Iear Iear Iear Iear Iear

-- -* -+ -G -) -O -/ -' -

( ( ( ( (

( ( ( ( ( ( ( ( (

( ( ( ( ( ( ( ( (


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Iear

*( !um

(

(

*G$(((

(

( (

(


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NAME RANGE PRP!"E

######## ########### ##################################################

$A"%" D5 Deprecia&'e &asis (or t)is asset

*EA"%$ +21 ,e'' to G!-! (or (easi&i'it. /etai's on screen

%NP-RANGE $1*20 Range (or Range %npt comman/

%*E D8 Asset 'i(e

!AN D13 oan 'engt)

PR!*%- +1 ,e'' to G!-! (or pro(ita&i'it. /etai's on screen


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capital investement

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