Agriculture Reference
In-Depth Information
13
Tools for evaluating capital
investment decisions
Objectives
•
Describe the role of capital investment decisions in an agribusiness
•
Examine and learn to apply basic tools for analyzing capital investment decisions in
agribusiness
•
Discuss the payback, simple rate of return, net present value, and internal rate of return
methods for evaluating capital investment decisions
•
Examine the data needs when using the net present value and internal rate of return
methods for evaluating capital investments
•
Describe the decision criteria for making and rejecting capital investments when using
the net present value and internal rate of return methods
Introduction
An area of major consequence for agribusiness managers is making capital investment
decisions.
Capital investment
refers to the addition of durable assets to an agribusiness,
which usually require relatively large fi nancial outlays and will last over a long period of
time. Typical capital investments might include trucks, manufacturing equipment, or storage
facilities. Even relatively small fi rms can spend millions each year on capital investments.
These investments tie up funds for long periods and release them slowly as the investment
produces revenue. The impact of these investment decisions may affect the business for
years to come. In addition to deciding whether or not to make a specifi c investment, the
agribusiness manager must also decide how to fi nance the investment. Capital investments
can be fi nanced through cash purchase, borrowing, or leasing.
This chapter will explore tools for evaluating capital investment decisions. Both rela-
tively simple tools and more sophisticated tools will be covered. Given the very large
amounts of funds involved, and the long-term nature of the investments, careful analysis of
capital investment decisions is another important skill of the effective manager.
Capital budgeting
There are many investment decisions that Brookstone Feed and Grain (BF&G) might face in
the normal course of business activity. Some of these include:
1 .
Expansion projects
: Would it be profi table to expand the grain storage and handling
facility now?
