The Next $120,000: A Case Study to Illustrate Analysis of Alternative Farm Investments in Fixed Assets

摘要

Dairy scientists specializing in the area of farm man- agement are increasingly involved in analysis of farm investments in fixed assets. There have been instances where the wrong procedures were used to assess invest- ments in fixed assets, leading to erroneous and possibly disastrous conclusions. A detailed case study of a dairy farm facing the decision of where best to invest an unex- pected $120,000 windfall is used to illustrate the vari- ous facets of financial analysis. Indicators of profitabil- it y, liquidity, solvency, repayment capacity, and finan- cial efficiency are explained and applied to the farm case to produce a detailed analysis of the current financial position of the firm. Long-range budgets of four alter- nate investment options and their impact on all finan- cial indicators are presented. The four options are: 1) to pay down debt, 2) to purchase an additional 100 cows, 3) to install automatic milk yield recording in the parlor, and 4) to build new heifer facilities. All four investments are profitable. Therefore, an analysis limited to profit- ability indicators would conclude that any of the four options is a good investment. However, liquidity and financial efficiency issues showed that the option of purchasing 100 cows is far superior to the three others. We conclude that a complete and thorough financial analysis is required to evaluate the impact of long-run investments in fixed assets.