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Farm Management > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q

used to analyze the profitability or financial viability of an investment on long-term or non-current assets that last for a number of years and/or on an enterprise that has a long gestation period.

A

investment analysis

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2
Q

purchase of farm capital assets is a form of

A

farm capital investment

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3
Q

why do farmers invest?

A

they expect the long-term returns above the cost of the investment are greater then any immediate returns

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4
Q

also known as capital budgeting

A

investment analysis

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5
Q

concept stating that value of money today is different from its value in the future

A

time value of money

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6
Q

capital originally invested (or borrowed)

A

principal

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7
Q

amount paid for the use of capital or amount received for the money invested

A

interest

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8
Q

principal plus interest

A

full amount

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9
Q

ratio of the interest earned in one time unit to principal

A

interest rate

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10
Q

maturity of loans, expressed in days, months, or years

A

time

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11
Q

simple interest formula

A

I = Prt

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12
Q

investment analysis restricted to business transactions where time involved is at most one year

A

simple interest

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13
Q

method that accrues “interest on interest”

A

compound interest

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14
Q

sum of the increases over the principal by the end of the term of investment

A

compound interest

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15
Q

cause of higher payments because of principal increasing over time

A

compound interest

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15
Q

cause of higher payments because of principal increasing over time

A

compound interest

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16
Q

total amount due which consists of the principal and the compound interest

A

compound amount

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17
Q

number of unit of time in one year as basis for computing interest

A

conversion period

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18
Q

simplest formula for final compound amount

A

F = P(1+i)^n

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19
Q

formula for for computing final compound at end of n period

A

F = P(1+j/m)^mt

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20
Q

process of finding the future value of a present amount, when accumulated interest also earns interest.

A

compounding

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21
Q

interest earned on both the initial principal and the interest reinvested from prior periods

A

compound interest

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22
Q

interest earned only on the original principal amount invested.

A

simple interest

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23
Q

process of finding the present value of a future
amount

A

discounting

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24
Q

interest rate in finding present values of a future amount

A

discount rate

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25
Q

done because a sum to be received in the future is worth less than the same amount today

A

discounting

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26
Q

discounting formula

A

PV = FV (1+j/m)^-mt

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27
Q

the sum of the present values of all the payments
of the annuity

A

present value of annuity

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28
Q

value of the annuity at the beginning of its term

A

present value of annuity

29
Q

sequence of periodic payments made at regular intervals of time

A

annuity

30
Q

time between succesive payment dates of an annuity

A

payment interval

31
Q

time from the beginning of the first payment interval to the end of the last one

A

term of the annuity

32
Q

formula for PVA

A

PVA=R X 1-(1+j/m)^mt all over j/m

33
Q

the sum of all the periodic payments at the end of
the term.

A

future value of annuity

34
Q

value of annuity at the end of its term

A

future value of annuity

35
Q

accumulation of the annuity

A

future value of annuity

36
Q

future value of annuity

A

PVA=R X (1+j/m)^mt - 1 all over j/m

37
Q

rate percent quoted/stated by the lender to the borrower, or in the other sense the actual monetary price that borrowers pay to lenders for the use of borrowed capital

A

nominal rate

38
Q

it is the rate which, if compounded annually, is
equivalent to the given rate

A

effective rate

39
Q

formula for effective rate

A

w = (1+j/m)^m - 1

40
Q

can also be used to compare the annual interest between loans with different compounding terms or conversion periods (daily, monthly, semi-annually, quarterly, or annually)

A

effective rate

41
Q

in determining cash flows, only incremental cash flow matters

A

true

42
Q

include all operating and investment cash flows

A

relevant cash flows

43
Q

obtained by multiplying production by the unit price of the commodity

A

gross revenue or income

44
Q

for fixed assets, this pertained to the value remaining unused at the end of investment project

A

residual or terminal value

45
Q

resale value of a fixed asset
that is used, and then put open for resale.

A

residual or terminal value

46
Q

for land, this is the market value including improvements, at the time the investment is terminated.

A

residual or terminal value

47
Q

purchase price/actual value of fixed capital items

A

fixed capital investment

48
Q

examples are material input costs; fuel cost; labor cost; land rent and crop/livestock insurance;

A

cash operating and maintenance expenses (production costs)

49
Q

include marketing costs, office utilities, salaries
of administrative personnel,

A

selling and administrative expenses

50
Q

2 general measures of profitability

A

undiscounted measures
-do not consider time value of money (TVM)

discounted measures
-consider time value of money (TVM)

51
Q

a type of undiscounted measure stating the number of years it takes to recover all
the capital invested.

A

payback period

52
Q

it is useful to highlight those investments that are
not viable

A

payback period

52
Q

it is useful to highlight those investments that are
not viable

A

payback period

53
Q

a type of undiscounted measure that recognizes that is not only income that is important to the farm but also the amount of capital used to produce it

A

return on investment (ROI)

54
Q

what ROI percentage is preferred

A

50% or more

55
Q

it is the opportunity cost of capital, representing the minimum rate of return required to justify the investment.

A

discount rate

56
Q

type of measure that considers the time value of money

A

discounted measures

57
Q

involves 2 additional elements which are discount rate and discounting period

A

discounted measures

58
Q

ratio of the sum of the discounted value of gross
benefits to the sum of the discounted value of
gross costs

A

benefit-cost ratio(BCR)

59
Q

condition in accepting the BCR computed

A

should be >1

60
Q

represents the present worth of the incremental net benefits.

A

net present value (NPV)

61
Q

condition in accepting the NPV computed

A

should be >0, meaning profitable

62
Q

the discount rate that equates the present values of the project’s benefits and costs

A

internal rate of return (IRR)

63
Q

maximum rate of return that an investment project could pay if all resources were borrowed, or if the investment project is to recover the investment and operating costs and still break even

A

internal rate of return (IRR)

64
Q

condition in accepting IRR

A

IRR>opp cost

65
Q

a straightforward measure of analyzing the effects of risks and uncertainty in investment analysis

A

sensitivity analysis

66
Q

conducted to assess the profitability of an investment when the discount rate is increased or decreased,

A

sensitivity analysis

67
Q

deals with the assessment of whether an investment will generate sufficient cash flows at the right time to meet the required cash outflows including loan payment

A

financial feasibility analysis

68
Q

the cumulative net cash flow (after financing) shows a financial shortfall, it requires additional financing

A

financial feasibility analysis

Farm Management (3 decks)

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