Understanding the cost of capital
• Agricultural businesses rely on borrowed capital
for inputs, machinery, equipment, and land
• Managing debt capital requires a farmer to
choose from among multiple financing sources
offering differing interest rates, rebates, points,
and other non-interest costs.
– Debt can increase the rate of growth in equity capital
– Debt will increase risk of equity loss
Financing decision aids
• Short-term financing alternatives
– Trade credit
– Credit cards/Lines of credit
• Intermediate-term financing alternatives
– Machinery and equipment loans
• Long-term financing alternatives
- Real estate loans
Design Considerations
• Developed to be easy to use and flexible
to encourage producers to compare
financing alternatives
• Uses Microsoft Excel and Visual Basic
for Applications (VBA) so that is readily
available to a wide range of users
• Macros are used to prevent accidental
corruption of code by user
Short-term Financing Module
• Uses the economic concept of opportunity
cost and the financial concept of time
value of money to determine the cost of
capital from supplier financing.
• Many agricultural input suppliers offer
terms of sale that offer cash discounts for
early payment. Such terms of sale typically
have a very high implicit cost of capital.
Example of short-term financing alternative
Intermediate-term Financing Module
• Uses time value of money concepts for
machinery and equipment purchases.
• Alternative sources of financing have
different interest rates and non-interest
costs.
• Dealers often offer a choice between
rebate dollars or lower interest rates.
Example of intermediate-term
financing alternative
Long-term Financing Module
• Different lenders often have different
terms, interest rates, and non-interest
costs.
• Many lenders also allow borrowers to pay
points to lower their interest rate.
• Also important are any stock requirements
such as that required by the Farm Credit
System (still working on impact of
patronage dividends on cost of capital).
Example of long-term financing alternative
Potential farm decision analysis tools:
• Leasing options calculator
– Will help farmers understand the risks inherent in leasing farm
assets including options to buy in leveraged leases
• Contracting options calculator
– Designed to analyze the risks associated with typical production
contracts including those common in poultry and swine
production
• On-farm methane digester capital budgeting model
– Will assist producers considering the implementation of an onfarm methane digester and would help them evaluate the risk
associated with bearing a large and irreversible investment