agribusiness chapter six

What are capital investments?

Large expenditures expected to provide benefits for multiple years.

Examples: Buying new machinery, constructing facilities, or acquiring land.

Why are capital investments important?

Essential for long-term growth and competitiveness in agribusiness.

Requires careful planning due to the high costs involved.

What is capital budgeting?

A process to evaluate and select the best long-term investments.

Includes assessing costs, risks, and future benefits of projects

What kinds of assets are evaluated in capital budgeting?

Physical assets: Tangible items like land, buildings, or equipment.

Nonphysical assets: Intangible investments like patents or software.

What is investing?

The process of committing money, time, or resources with the expectation of earning a financial return in the future.

Involves taking calculated risks to achieve long-term benefits.

What does investing warrant?

Wise Decisions: Thorough analysis and planning to maximize returns.

Large Sums of Money: Investments often require substantial upfront costs.

Thorough Analysis: Evaluating risks, benefits, and potential outcomes before proceeding

What is cash flow?

The movement of money in and out of a business.

Positive Cash Flow:

Money coming into the business (e.g., revenue, savings).

Negative Cash Flow:

Money going out of the business (e.g., expenses, investments).

Net Cash Flow:

The difference between positive and negative cash flows, indicating overall profitability.

Why is cash flow important for capital investments?

Helps determine if an investment will generate enough returns to cover its costs.

Ensures a business maintains liquidity while funding projects.

What is the payback period?

The amount of time it takes to recover the initial investment cost.

Formula: Initial Investment ÷ Annual Cash Flow.

What is an example of calculating the payback period?

Investment: $140,000. Annual Cash Flow: $28,000.

Payback Period = $140,000 ÷ $28,000 = 5 years.

What are the limitations of the payback period method?

Ignores the Time Value of Money:

Treats money received in the future as equal to money received today.

Does not account for potential interest earnings on earlier returns.

Example of limitations of the payback period method?

If you invest $1,000 today, it might grow to $1,100 next year at 10% interest.

The payback method doesn't account for this growth—it just looks at how long it takes to recover the $1,000.

What is the time value of money?

The concept that money today is worth more than the same amount in the future.

Affects investment decisions by emphasizing earlier returns

What is the difference between simple and compound interest?

Simple Interest: Earned only on the initial investment.

Compound Interest: Earned on both the initial investment and previously earned interest.

What is the formula for compound interest?

A=P(1+r)n:

A: Total amount.

P: Principal (initial investment).

r: Interest rate.

n: Number of years.

What is future value (FV)?

The amount an investment will grow to in the future at a specific interest rate.

Formula: FV=PV(1+i)nFV=PV(1+i)n

What is present value (PV)?

The current value of future cash flows, discounted for interest.