Agriculture Reference
In-Depth Information
Table 13.7
Net cash infl ows for the self-propelled
applicator investment
Year
Net Cash Infl ow (dollars)*
1
90,000
2
88,000
3
86,000
4
84,000
5
98,000 * *
Notes: * The net cash infl ow is the excess of cash revenue
over cash expenses attributed directly to the investment.
Depreciation and other noncash expenses are excluded.
** Includes $16,000 from sale of the applicator when
scrapped.
Table 13.8
Net present value for applicator investment with 14 per cent
discount factor
Year
Net Cash Infl ow
(dollars)
14 Percent Discount
Factor (dollars) *
Present Value
1
90,000
0.8772
= $78,948.00
2
88,000
0.7695
= 67,716.00
3
86,000
0.6750
= 58,050.00
4
84,000
0.5921
= 49,736.40
5
98,000
0.5194
= 50,901.20
Total Present Value
$305,351.60
Initial Investment in
Applicator
$300,000.00
Net Present Value
$5,351.60
Note: * see
Table 13.2
.
is more than the investment cost ($312,500), the NPV is positive for the grain storage invest-
ment alternative as well. This means the grain storage expansion investment also meets the
owners' 14 percent criterion, since the NPV is $47,631.
The net present value method of investment analysis has several advantages. First, it
deals with cash fl ows rather than accounting profi ts. Second, the method is sensitive to the
actual timing of the cash fl ows resulting from the investment. Third, the time value of money
enables the user to compare benefi ts and costs in today's dollars. Finally, because invest-
ments are accepted if a positive net present value is calculated, the acceptance of an invest-
ment will increase the value of the fi rm. That is consistent with the goal of managers to
maximize shareholders' wealth.
One disadvantage of the net present value method results from the need for detailed, long-
term forecasts of cash fl ows. These forecasts over long time periods are just that, forecasts.
So, there is considerable pressure on the manager to forecast cash infl ows and outfl ows as
accurately as possible.
