Land Purchase Analysis: Program Overview
The Land Purchase Analysis program is used to evaluate the economic returns of farmland purchases.
Maximum bid prices for farmland are calculated with this program. Maximum bid price is the purchase
price that would allow an investor to earn a specific rate of return under stipulated conditions. The
sensitivities of the maximum bid price to changes in the terms of the purchase, investment horizon, and
investor conditions are also assessed.
The information needed to run this program can come from:
1.
An individual’s farm records.
2.
Land Sale Announcement
3.
Financing information.
To make use of this program, you must be able to provide estimates of land, financial, and tax
information. The program requests the following information:
A.
Land Information:
Analysis price, additional cash flows in first year, property taxes in first year, annual cash flow
growth rate, annual appreciation rate of land values, closing fees, and selling fees.
B.
Financing Information:
Down payment, annual interest rate, and length of loan (# of years).
C.
Investor Information:
Marginal tax rate, capital gains tax rate, after-tax discount rate.
D.
Solver Information:
Investment yield sensitivity range and cash flow sensitivity range.
The main menu is shown below:
Navigating the Land Purchase Analysis program
The Land Purchase Analysis program has a main menu. The main menu collects the input data. On the
main menu, there are two buttons: Solve for Maximum Bid Price and Crop Budget. The Crop Budget
Button is discussed in the Land Information Section of the Input description following this section.
The Solve for Maximum Bid Price Button is used to calculate the maximum bid prices, cash flow
needed, appreciation rate needed, and cash flow growth rate for 5, 10, and 30-year investment periods.
There are also two drop-down menus found on the main menu.
The Select report** to view menu allows a user to select the name of a report on the main menu to view.
This is done by (a) placing the cursor on the arrow of the “select report to view” box, (b) scrolling down to
highlight the report of choice, and (3) clicking the left button on the mouse.
The Select report** to print menu allows a user to select the name of a report on the main menu to print.
This is done by (a) placing the cursor on the arrow of the “select report to print” box, (b) scrolling down to
highlight the report of choice, and (3) clicking the left button on the mouse.
** The following reports are available to view and print. Individual information about each
report can be found later in the documentation: Sensitivity Tables, Crop Budgets, 5-year
Model, 10-year Model, 30-year Model, Cash flow Chart, Yield Chart, Growth Chart
There are tabs at the bottom of the Excel spreadsheet screen that can help navigate the user through the
program. Click on the name of the screen you wish to view. The tabs are called:
Main-Land Bid Price takes you to the input menu.
Sensitivity Tables takes you to 6 tables that represent the effect of outcomes when inputs are changed.
Crop Budgets takes you to the Crop Budget input worksheet, also found by using the Crop Budget button
on the main menu.
5-year Model takes you to the worksheet displaying a 5-year horizon cash flows.
10-year Model takes you to the worksheet displaying a 10-year horizon cash flows.
30-year Model takes you to the worksheet displaying a 30-year horizon cash flows.
Cash flow Chart takes you to a graph displaying the sensitivity of the bid price to changes in cash flow.
Yield Chart takes you to a graph displaying the sensitivity of the bid price to changes in investment yields.
Growth Chart takes you to a graph displaying the sensitivity of the bid price to changes in the growth rate
of cash flows and land values.
How to use the Input Sections
There is an input worksheet included in this documentation to help with the collection of information.
Typically, the inputs are entered on a per acre basis; however, purchase prices and costs for the entire
tract can be used.
Note: Only enter inputs in a yellow box where the text is blue. The other numbers shown are calculated
using formulas that include the inputs. These boxes are protected so that formulas cannot be
accidentally changed. If you click on a “protected” box, you will receive the following message:
The land purchase analysis program allows the user to enter all required input on a single input screen.
This screen is shown below.
The input required for this program is entered in 4 sections: land information, financing information,
investor information, and solver information. Each section will include an explanation of the inputs, as
well as case study details.
Land Information section
The Analysis price is the asking price or price a user wishes to evaluate.
The Additional cash flows: year 1 is the net cash flows generated by the land purchase in the first year.
The value should include all cash inflows and outflows except for real estate taxes and loan payments.
The user may estimate the cash flows in the first year by using the “Crop Budget”. To do this, click on the
“Crop Budget” button. An explanation of the Crop Budget is below. If the analysis price is entered on a
per acre basis, be sure to enter additional cash flows on a per acre basis.
The Crop Budget Button is shown in the input section after “Additional cash flows: year 1”. This button
displays the Crop Budget Report (shown below). This section allows the user to enter detailed crop
information to determine the additional cash flows for the farmland in the first year of ownership.
Crop Budget Input Worksheet
How to use the Crop Budget Input Worksheet:
For each commodity, fill in the yellow boxes with blue text where applicable. Be sure to calculate values
on a PER TILLABLE ACRE basis. The model will calculate the subtotals, total expenses, and net cash
flow for year 1 as information is entered.
Use Values in the Model: To enter the values in the model, click on the “Use Values in Model” button.
The screen shown below will appear.
By selecting “Yes”, the main menu will automatically appear and the information from the crop budget is
entered next to “Additional Cash Flows: Year 0”.
The property taxes in year 1 are the amount of property taxes used in calculating property tax
obligations. If the analysis price is entered on a per acre basis, be sure to enter property taxes on a per
acre basis.
The annual cash flow growth rate (%) is the annual anticipated change in cash flows from the
Additional cash flows for year 1 entry.
The annual appreciation rate of land values (%) indicates the annual anticipated change in land
values.
The closing fees (% of initial purchase) are the amount of fees paid (expressed in % of initial purchase)
to close on farmland at the time of purchase. Closing fees equal the maximum bid price multiplied by
this entry.
The selling fees (% end of horizon) are the approximate fees (expressed as a % of final land price)
required to sell this property. Selling Fees equal the value of land at the end of the horizon multiplied by
this entry.
Financing Information section
The down payment (%) is the amount of purchase price that is not financed. The percentage entry can
range from 0 to 100 percent. An entry of 0 means that none of the purchase price is financed with debt.
An entry of 50 means that 50 percent of the maximum bid price is financed with debt. Constant loan
payments are calculated using straight-line amortization.
The annual interest rate on loan (%) is the annual interest rate on the loan.
The length of loan (years) is the amortization period.
Investor Information section
The marginal tax rate (%) is the income tax rate for the user. An entry of 15 % means that 15% of the
next dollar earned goes towards income taxes.
The capital gains tax rate (%) is the tax rate on capital gains (ie. the appreciation of land values) at the
time of the land sale.
The after-tax discount rate (%) is the after-tax discount rate used to calculate the present value of future
cash flows.
Solver Information section
The investment yield sensitivity range (%) is the value used to determine the range used in sensitivity
analysis for investment yields. For example, an entry of 2% would result in maximum bid prices being
calculated for investment yields of 1% below and above the specified discount rate (a total range of 2).
The cash flow sensitivity range (%) is the value used to determine the range on cash flow sensitivity
analysis. For example, an entry of 10% would result in maximum bid prices being calculated for changes
in the initial stated cash flow level from –5% to +5% or a total 10% range.
Land Purchase Input Completion Form
*This form will assist in organizing the information required to run the
Land Purchase Analysis
Land Information
Option 1
Analysis Price
Additional Cash Flows
Property Taxes
Cash Flow Growth Rate (%)
Land Value Appreciation (%)
Closing Fees (%)
Selling Fees (%)
Financing Information
Down Payment (%)
Interest Rate (%)
Loan Length (years)
Investor Information
Marginal tax rate (%)
Capital Gains Tax Rate (%)
Discount Rate (%)
Solver Information
Investment Yield Sensitivity Range (%)
Cash Flow Sensitivity Range (%)
RESULTS
Maximum Bid Price (5 years)
Maximum Bid Price (10 years)
Maximum Bid Price (30 years)
Option 2
Option 3
Results , Reports & Tables, and Graphs
The Land Purchase Analysis program generates a Results section, multiple tables and reports, as well as
graphs.
Results
On the main menu, there is a results section located under the input sections. The Results Section
provides a quick look at the calculations generated for 6 categories: net present value for the analysis
price, maximum bid price, investment yield for the analysis price, the initial cash flow needed to achieve
the desired yield, the cash flow growth rate needed to achieve the desired yield, and the appreciation rate
needed to achieve the desired yield. Each of these sections are described below.
Net Present Value: Analysis Price
This section shows the net present value (NPV) of the bid price over an investment horizon of 5, 10, and
30 years. Net present value is the sum of the present values of future cash flows. In the above example,
the NPV is negative for all investment periods. This means the rate of return for the land purchase is less
than the specified discount rate. Or, stated differently, the sum of the cash flows in present value terms is
negative.
Maximum Bid Price
The model uses time value of money concepts to calculate maximum bid prices. The maximum bid price
is the initial investment value that would provide the investor a return equal to the specified after-tax
discount rate. For example consider a maximum bid price of $2,398 for a 10-year period and a 6%
discount rate. The user will gain the same wealth by investing the farmland’s down payment in an asset
having a 6% after-tax rate of return for 10 years as if a user paid $2,398 for the farmland.
The model provides maximum bid prices for investment horizons of 5, 10, and 30 years. In this example,
the maximum bid prices are $2,368 per acre for 5 years, $2,398 per acre for 10 years, and $2,478 per
acre for 30 years.
Investment Yield: Analysis Price
This section shows the after-tax investment yield, or return, of the analysis price over an investment
horizon of 5, 10, and 30 years. In the example, the investment yield is 4.59% for 5 years, 4.91% for 10
years, and 5.45% for 30 years. This indicates that at an analysis price of $2,800 per acre, an after-tax
return of 4.59% is achieved for a horizon of 5 years.
Initial Cash Flow Needed to Achieve Desired Yield
This section gives the cash flow in the first year needed to make the analysis price profitable (or equal to
the bid price). The initial cash flow will increase at the specified rate Annual cash flow growth rate(%).
In this example, $155.20 is needed in year 1 for a land purchase of $2,800 with a discount rate of 6% and
5 year horizon to be profitable.
Cash Flow Growth Rate Needed to Achieve Yield
This section shows the growth rate in cash flows needed to make the analysis price profitable (or equal to
the bid price) at the cash flow levels entered in Additional Cash Flows: Year 1. In this example, an
annual growth rate of 11.88% in cash flows is needed to make the $2,800 analysis price profitable after 5
years.
Appreciation Rate Needed to Achieve Desired Yield
This is the annual change in land values needed to make the analysis price profitable (or equal to the bid
pride) at the cash flow and cash flow growth rates entered. In the above example, an increase in land
values of 3.66% is needed for the $2,800 analysis price to be profitable after 5 years.
Reports & Tables
The Land Purchase Analysis program generates a set of tables, as well as cash flow reports.
Sensitivity Analysis Tables
There are 6 sensitivity tables included in this section. Each is described below:
Maximum Bid Price
This table displays the maximum bid prices for each investment horizon.
Bid Prices at Alternative After-Tax Investment Yields
This table displays the bid prices for each investment horizon with respect to the after-tax discount rates.
In this example, a bid price of $2,249 is calculated for a user who has an after-tax discount rate of 6.5%
and an investment horizon of 30-years.
Cash Flow Sensitivity Analysis @ After-Tax Investment Yield
This table displays bid prices for each investment horizon with respect to changes in the initial net cash
flows levels at the specified after-tax discount rate. In this example, a 2.5% increase in the initial cash
flow cash flow level equals $138 per year (135 x 1.025). For a 5-year investment horizon, the bid price
associated with this increase at the 6% after-tax discount rate is $2,440.
Bid Prices at Alternative Growth Rates
This table displays the bid prices per acre associated with the growth rates of cash flows and land values
that make the analysis price profitable (or equal to the bid price). In this example, a bid price of $1,582
for a 10-year horizon will be profitable if the growth rate of cash flows and land values equal 1.0%
(instead of the stated growth values in the input section).
Initial Cash Flow Needed to Achieve Yield
This table displays the initial annual cash flow needed to achieve a required return. In this example, a
yearly cash flow of $136.50 for 10 years is needed to make the analysis price ($2,800/acre) profitable at a
required return of 5%.
Growth Rates: Cash Flow and Land Values Needed to Achieve After-Tax Investment Yield
This table displays the growth rates needed in yearly cash flows and land values to achieve a required
return. In this example, a growth rate of 4.09% in yearly cash flows and land values is needed to make
the analysis price ($2,800/acre) profitable if the user’s required return is 7%.
5-, 10-, and 30- year Cash Flow Worksheets
Each worksheet contains a detailed cash flows report for the analysis. The reports include: net cash
flows, property taxes and amortized closing costs, debt payments, debt outstanding, interest payments,
down payment and principal payments, capital gains tax, land value, the ending debt value, and the net
after-tax cash flows.
5 Year Horizon
10 Year Horizon
30 Year Horizon
Graphs

Cash Flow Chart: Sensitivity of Bid Price to Change in Cash Flow
This chart maps the relationship of bid price to % change in cash flow for the first year of the
analysis. The lines represent the combination of yearly cash flow and bid prices that equal a
return equal to that of the discount rate. In this example, the lower the line on the chart, the better
the return per dollar.

Yield Chart: Bid Price versus Investment Yields
This chart maps the relationship between maximum bid prices and discount rates for each of the
investment horizons.
 Growth Chart: Bid Price versus Annual Growth Rate of Cash Flows and Land Values
This chart shows the relationship of maximum bid prices to the annual growth rate of cash flows and land
values that make the analysis price profitable (or equal to the bid price). In this example, the lower the
line, the cheaper the bid price per growth rate is needed to make the analysis price profitable.