The Basics of Capital Budgeting


Hello again from wonderful Winnemucca, Nevada. Thank heavens we finally received a little rain, the bad part was their was 500 acres of prime second crop on the ground. It has been so dry that it is probably ok,and the ranchers are needing hay and will be grateful for the rain to help their range.

Today’s post is all about the basics of capital budgeting. In the past two weeks I have talked to two different farmers who are thinking about growing additional alfalfa acres. I could not help but wonder if it would be cost effective to purchase hay equipment or if they should contract to local farmers in the area to put up their hay. This seemed like a perfect example for a capital budgeting exercise. I was not too surprised with the results of the analysis, but I was surprised of the high cost of operating hay equipment. In this example, I assumed the farmer would raise 500 acres of alfalfa, and would purchase new hay equipment. The equipment will include a swather, rake, and baler. It is assumed the farmer has the ability to stack the hay, and has tractors and labor available to take on harvesting the alfalfa.

Baler Swather Rake

Please see the PowerPoint link below for all the details. Please download the file right to Powerpoint. The “GoogleDoc” file did not upload the format correctly. The “download” button is in the upper left hand corner of the screen, marked as a down arrow.

It looks like the investment in new hay equipment would be a wise purchase. I would look at other alternatives as well such as purchasing good used equipment to lower the annual equipment payments.

As always-please comment, disagree or ask a question.



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