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