scholarly journals Discounted cash flow valuation of conventional and cage-free production investments

2021 ◽  
pp. 1-18
Author(s):  
Carlos J.O. Trejo-Pech ◽  
Jada M. Thompson
Keyword(s):  
Opportunity Cost ◽  
Egg Production ◽  
Cost Of Capital ◽  
Deterministic Model ◽  
The United States ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Discounted Cash Flow ◽  
Conventional Production ◽  
Discounted Cash Flow Valuation

This study compares profitability and risk of conventional and cage-free egg production in the United States. Evaluating cage-free production is particularly relevant given ongoing consumer driven changes and new cage-free legislation. Results show that while the Modified Internal Rate of Return (MIRR) for conventional production is above an estimated industry opportunity cost of capital, cage-free production’s MIRR does not fully satisfy investors’ expectations. The MIRR of cage-free investment, between 5.6% (deterministic model) and 8.0% (stochastic) per 15-month flock, is below the 9.4% opportunity cost of capital. In addition, the simulations show that there is a 90% probability of conventional production’s MIRR falling between 18.5 and 20.3% per 15-month flock, and cage-free egg production’s MIRR ranging from 6.8 to 9.4%. In order for cage-free to be as equally profitable as conventional production, cage-free egg prices at the farmer gate should be 74% over conventional egg prices. Such high cage-free egg prices are highly unlikely to occur given recent cage-free price premia and consumer willingness to pay estimates from recent research. This study provides a framework egg producers can use to evaluate the potential effects of changes in their portfolio of products (i.e. conventional and cage-free mix) as they accommodate production schedules in this evolving industry.

Introducing Investment Options

2021 ◽  
pp. 131-135
Author(s):  
Camilla Toulmin
Keyword(s):  
Decision Making ◽  
Opportunity Cost ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Payback Period ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Risk And Uncertainty ◽  
Present Value ◽  
Over Time

This chapter offers a brief survey of how the investment literature deals with risk and uncertainty, and examines the reasons for variation in returns between farmers from the principal assets – wells, oxen plough-teams, breeding cattle. Simple decision-making models derive criteria for choosing between investment options according to the net present value, internal rate of return, and payback period associated with a given pattern of returns over time. Portfolio models presents the rationale for investment in a range of assets, the returns from which are poorly correlated. Farmers differ in terms of their access to factors of production, the scale of their activities, the opportunity cost of capital, and vulnerability to risk. Four idealised household types – A, B, C, D – are described in order to compare the flow of returns from the three principal investments – wells, oxen plough-teams, and breeding cattle.

scholarly journals The most appropriate discount rate

2013 ◽  
Vol 4 (03) ◽  
pp. 391-400 ◽  
Author(s):  
David F. Burgess ◽  
Richard O. Zerbe
Keyword(s):  
Private Sector ◽  
Discount Rate ◽  
Opportunity Cost ◽  
Time Preference ◽  
Cost Of Capital ◽  
Rate Of Return ◽  
Social Time ◽  
The Social ◽  
Benefits And Costs

The social opportunity cost of capital discount rate is the appropriate discount rate to use when evaluating government projects. It satisfies the fundamental rule that no project should be accepted that has a rate of return less than alternative available projects, and it ensures that worthy projects satisfy the potential Pareto test. The social time preference approach advocated by Moore et al. fails to satisfy either of these criteria even in the unlikely case that the private sector behaves myopically with respect to a project’s future benefits and costs.

Profitability, risk and cash flow deficit for beginning cow–calf producers

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Carlos J.O. Trejo-Pech ◽  
Jared Bruhin ◽  
Christopher N. Boyer ◽  
S. Aaron Smith
Keyword(s):  
Cash Flow ◽  
Opportunity Cost ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Herd Size ◽  
Discounted Cash Flow ◽  
Production Risk ◽  
Content Type ◽  
Market Values ◽  
Cow Calf

PurposeThe purpose of this study is to estimate the amount of cash flow deficit, if any, needed to maintain the operating costs and service debt of a startup cow–calf enterprise. The study compares long-term profitability and risk between starting small and building a herd to full carrying capacity or by starting at desired herd capacity.Design/methodology/approachA dynamic cattle growth model was developed to capture expanding and maintaining the desired herd size. Discounted cash flow (DCF) models over a 15-year period were calculated to estimate net present value (NPV), modified internal rate of return (MIRR) and cash flow deficit to keep the business operating and service debt. Simulation analyses were conducted considering price and production risk.FindingsStarting at the desired herd size was preferred, according to NPV/MIRR and cash flow deficit, but the differences were not substantial. Assuming the operation is liquidated at book values, there was a 36.3% probability of this enterprise having a zero or positive NPV. If the conservative terminal value assumption is relaxed up to feasible market values, the cow–calf enterprise is economically attractive at an estimated 2.4% opportunity cost of capital. However, the producer would experience a cash flow deficit during the first seven years, which was simulated to be $14,892 and $15,985 annual for both strategies.Originality/valueInnovative methods used in this study include varying the annual opportunity cost of capital as a function of financing decisions, stochastic prices by cattle type and stochastic weaning weights that are a function of a dynamic cattle model.

VALUASI BISNIS BARU DAN OPTIMAL CAPITAL PERUSAHAAN JASA INDUSTRI (MAKLON) BAGI UMKM KERIPIK KEMASAN. (STUDI KASUS: PT KRISPINDO)

2020 ◽  
Vol 12 (2) ◽  
pp. 254-269
Author(s):  
Helena Dewi
Keyword(s):  
Cash Flow ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Free Cash Flow ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Going Concern ◽  
Internal Rate ◽  
New Business ◽  
Equity Ratio

The increase of MSMEs in the food and beverage industry recently experiencing significant growth, especially during the Covid-19 pandemic. According to statistical data released by the Badan Pusat Statistik (BPS) in November 2020, the food industry dominated Micro and Small businesses in 2019 for 36.23%. The increasing number of MSME businesses in this sector becomes an opportunity for the processing services industry (contract manufacturer) to help MSMEs with all limitations. This study conducted a case study on PT. Krispindo as a company engaged in processing services (contract manufacturer) in the snack sector. This research aims to assess (valuation) new business proposed by PT. Krispindo in terms of optimal use of debt and equity for the company and also investment returns that can be given to investors. In addition, this research also aims to assist the company in making decisions for the following period project, decision to continue or discontinue the business. This study used optimal Cost of Capital (WACC) and Debt-to-Equity Ratio (DER) in setting optimal business capital. To measure investment return expectations for investors, the study used the company's Net Present Value (NPV), Free Cash Flow to Firm (FCFF) and Internal Rate of Return (IRR) approaches. To find out whether or not the business is further, this study uses Terminal Value Asset (TVA) and On Going Concern Value from the business obtained when the project ending. The results prove using debt in capital has more benefit for the company and the business can continue after the projection period ends.   Keywords: New Business Valuation (NPV), Debt-to-equity ratio (DER), Average Cost of Capital (WACC), Free Cash Flow to Firm (FCFF), Internal Rate of Return (IRR), Terminal Value Asset (TVA) and On Going Concern Value

The Weitzman Argument

2012 ◽  
Author(s):  
Christian Gollier
Keyword(s):  
Discount Rate ◽  
Opportunity Cost ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Cash Flows ◽  
Simple Rule ◽  
Rate Of Return ◽  
Net Benefit ◽  
Investment Projects ◽  
Net Benefits

This chapter examines a model in which the exogeneous rate of return of capital is constant but random. Safe investment projects must be evaluated and implemented before this uncertainty can be fully revealed, i.e., before knowing the opportunity cost of capital. A simple rule of thumb in this context would be to compute the net present value (NPV) for each possible discount rate, and to implement the project if the expected NPV is positive. If the evaluator uses this approach, this is as if one would discount cash flows at a rate that is decreasing with maturity. This approach is implicitly based on the assumptions that the stakeholders are risk-neutral and transfer the net benefits of the project to an increase in immediate consumption. Opposite results prevail if one assumes that the net benefit is consumed at the maturity of the project.

Serial Defaults, Serial Profits

2017 ◽  
Author(s):  
Mauricio Drelichman ◽  
Hans-Joachim Voth
Keyword(s):  
Opportunity Cost ◽  
Cost Of Capital ◽  
Rate Of Return ◽  
Short Term ◽  
Philip Ii ◽  
Alternative Investments

This chapter looks at the profitability of banking families. Lending to the king of Spain made good business sense; it was hugely profitable on average, despite periodic defaults and restructurings. Defaults and reschedulings reduced the rate of return, but profitability net of these losses was still high—and markedly higher than the return on alternative investments. The same conclusion emerges from analyzing the profitability of loans by the banking dynasty. Of the sixty families that lent to Philip, only five failed to earn their likely opportunity cost of capital—and these bankers provided only a negligible proportion of the short-term loans taken out by the king. As a consequence, few financiers ever stopped lending to Philip II.

B. ANALISA KELAYAKAN BISNIS PADA USAHA SWEETIN

2021 ◽  
Vol 4 (1) ◽  
pp. 11
Author(s):  
Vivi Indah Yani ◽  
Rachmat Mustofa Pratama ◽  
Izza Islami ◽  
Iman Supriadi
Keyword(s):  
Net Present Value ◽  
Cost Of Capital ◽  
Payback Period ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Internal Rate ◽  
The Cost ◽  
Business Study

Abstrak Tujuan dari penelitian ini adalah untuk menganalisis dan mendeskripsikan studi kelayakan bisnis yang dilakukan pada Kewirausahaan “Sweetin” yaitu usaha yang baru dirintis di Surabaya dalam bidang makanan (dessert). Penelitian ini menggunakan metode Net Present Value (NPV), Internal Rate of Return (IRR) dan Payback Period (PP). Hasil yang diperoleh dalam penelitian ini yaitu nilai NPV sebesar Rp. 1.910.819 > dari nol. Nilai IRR sebesar 110% > dari cost of capital 10%. Dan PP 1 bulan. Hal ini berarti kewirausahaan Sweetin ini menunjukkan bahwa secara non-finansial dan finansial layak untuk dijalankan. Kata kunci: Kelayakan Usaha, Non-Finansial, Finansial Abstract             The purpose of this research is to analyze and describe the business study conducted on “Sweetin” Entrepreneurship, a business that has just been pioneered in Surabaya in the field of food (dessert). This study uses the method of Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period (PP). The results obtained in this study are the NPV value of Rp. 1,910,819> from zero. The IRR value is 110%> 10% of the cost of capital. And 1month PP. This means that Sweetin's entrepreneurship shows that it is non-financially and financially feasible to run. Keywords: Business Feasibility, Non-financial, Financial

A Comparison of the Weighted-Average Cost of Capital and Equity-Residual Approaches to Valuation

2017 ◽  
pp. 1-5
Author(s):  
Robert S. Harris
Keyword(s):  
Cash Flow ◽  
Average Cost ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Technical Note ◽  
Discounted Cash Flow ◽  
Investment Projects ◽  
Discounted Cash Flow Valuation

This technical note compares two methods of treating debt usage in discounted-cash-flow valuation of investment projects or companies. The note demonstrates that the approach using weighted average cost of capital (WACC) and the approach using equity residual (ER) yield equivalent results if consistent assumptions are used. General features are illustrated with specific examples, including a spreadsheet.

scholarly journals Irreversible Investment, Capital Costs and Productivity Growth: Implications for Telecommunications

2007 ◽  
Vol 6 (3) ◽  
Author(s):  
Jeffrey I. Bernstein ◽  
Theofanis P. Mamuneas
Keyword(s):  
Productivity Growth ◽  
Opportunity Cost ◽  
Cost Of Capital ◽  
Rate Of Return ◽  
Irreversible Investment ◽  
Capital Costs ◽  
Tfp Growth ◽  
Percentage Points ◽  
Investment Capital ◽  
Hurdle Rate

This paper develops a model incorporating costly disinvestment and estimates the associated commitment premium required to invest in telecommunications. Results indicate that the irreversibility premium raises the opportunity cost of capital by 70 percent. This implies an average annual hurdle rate of return of 14 percent over the period 1986-2002. Irreversibility creates a distinction between observed and adjusted TFP growth. Observed growth, which omits the premium, annually averaged 2.8 percent from 1986 to 2002. This rate exceeded the (premium) adjusted TFP growth by 0.7 percentage points, therefore the average annual observed productivity growth overestimated the corrected rate by 33 percent.

Sign in / Sign up

Export Citation Format

Share Document