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fm6e-chapter19 - Farm Management Chapter 19 Capital and the...

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Farm Management Chapter 19 Capital and the Use of Credit
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farm management chapter 19 2 Chapter Outline Economics of Capital Use Sources of Capital Types of Loans The Cost of Borrowing Sources of Loan Funds Establishing and Developing Credit Liquidity Solvency
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farm management chapter 19 3 Chapter Objectives 1. Point out the importance of capital in agriculture 2. Illustrate the optimal use and allocation of capital 3. Compare different sources of capital and credit 4. Describe different types of loans 5. Show how to set up repayment plans 6. Explain how to develop credit worthiness 7. Examine factors affecting liquidity and solvency
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farm management chapter 19 4 What is Capital? People think of capital as cash, balances in savings and checking accounts, and other liquid funds. Capital also includes money invested in assets. Agriculture has one of the highest ratios of capital to workers in U.S. industries. Many commercial farms have capital investments of over $1,000,000.
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farm management chapter 19 5 Figure 19-1 Capital investment in U.S. agriculture Source: USDA Put figure 19-1 here, no title
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farm management chapter 19 6 Credit Credit is the ability to borrow money with a promise to repay the money in the future along with interest for its use.
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farm management chapter 19 7 Economics of Capital Use How much total capital should be used? How should limited capital be allocated among its many potential uses?
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farm management chapter 19 8 Total Capital Use When unlimited capital is available, the question is how much in total to use. In chapter 7, the concept of using an input until its marginal value product (MVP) equals its marginal input cost (MIC) was explained. The same concept applies to capital.
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farm management chapter 19 9 MVP and MIC of Capital The MVP of capital is the additional
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