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fm6e-chapter17 - Farm Management Chapter 17 Investment...

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Farm Management Chapter 17 Investment Analysis
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farm management chapter 17 2 Chapter Outline Time Value of Money Investment Analysis Financial Feasibility Income Taxes, Inflation, and Risk
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farm management chapter 17 3 Chapter Objectives 1. Explain the time value of money and its use 2. Illustrate the process of compounding 3. Demonstrate the process of discounting 4. Discuss the payback period, simple rate of return, net present value and internal rate of return 5. Show how to apply these concepts 6. Explain how income taxes, inflation, and risk affect investment analysis
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farm management chapter 17 4 Time Value of Money 1. The dollar could be invested to earn interest 2. If dollar is spent on consumption, we’d prefer to get the enjoyment now 3. Risk is also a factor as unforeseen circumstances could prevent us from getting the dollar 4. Inflation may diminish the value of the dollar over time A dollar today is preferred to a dollar in the future:
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farm management chapter 17 5 Present Value and Future Value Present Value (PV) : the number of dollars available or invested at the current time or the current value of some amount to be received in the future Future Value (FV) : the amount to be received at some future time or the amount a present value will be worth at some future date when invested at a given interest rate
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farm management chapter 17 6 More Terms Payment (PMT) : number of dollars to be paid or received in a time period Interest Rate ( i ) : also called the discount rate - the interest rate used to find present and future values, often equal to opportunity cost of capital Time Periods ( n ) : the number of time periods used to compute present and future values Annuity : a term used to describe a series of periodic payments
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