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Farm Overview

Farm Overview. Table of Contents. Introduction Financial Health S.W.O.T. Analysis Problem Statement Risk Assessment Computing a Discount Rate. Vision.

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Farm Overview

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  1. Farm Overview

  2. Table of Contents • Introduction • Financial Health • S.W.O.T. Analysis • Problem Statement • Risk Assessment • Computing a Discount Rate

  3. Vision The project’s vision is to project discounted cash flows for a cattle feedlot expansion utilizing an appropriate discount rate for 30 years.

  4. Additional information(temp) • There are 50 other cattle operations of this size in Michigan. The feedlot, which we are considering doubling in size, has only cattle. The operation’s relevant market is the Eastern Corn Belt and it faces the possibility of its main processing plant closing down. The enterprise buys yearling steers at 700 lbs and sells at 1300 lbs. If will take approximately 180 days to bring the yearling steers to 1300 lbs from 700 lbs at a rate of about 3.33 lbs of average gain per day. • Why is this a potentially Promising Business Idea? • The feedlot expansion will increase cattle net sales. • What is the Projected Time Frame for this Project? • The project will take three months until the lot construction is complete after financing is acquired. It will take approximately between three and six months to reach full production from start-up. • Is there a Life-cycle to the project beyond scaling up? If so, describe. • The ongoing costs associated with raising cattle and feed will continue as long as the business is in operation. • What is the project’s salvage value? • $100,000

  5. Financial Health • Profitability • Liquidity • Solvency • DuPont Analysis

  6. Financial Health (1999-2009) Profitability Liquidity

  7. Profitability Analysis • Farm income • Farm Return on equity • Return on assets • Return on equity • Return on shareholder equity

  8. Profitability Analysis • Operating Profit • Asset Turnover Rate • Return on Equity

  9. Liquidity Analysis current ratio averaged 8.3 The term debt coverage ratio is one area of grave concern. The ratio has declined every year between 1999 and 2008--from a high of 26 to a low of 1.67. The ratio bounced back to 2.01 in 2009 however this ratio is still far too low indicating that that the concern should concentrate on improving net farm income this before contemplating a capital expenditure.

  10. Solvency Analysis The enterprises’ net worth has increased from 1,202,677 in 1999 to 3,176,875 In 2008—the last year for which data is available. The farm’s equity-to-asset ratio has remained relatively stable during the period. Importantly, the firm is now relatively unlevered with a debt-to-equity ratio as of 2008 of .48

  11. Cattle Profitability Analysis • DuPont Analysis • Equity Multiplier • Turnover • Revenue Growth

  12. DuPont Analysis Operating Profit Margin = Operating Income / Sales Asset Turnover Rate = Revenue / Assets Equity Multiplier = Total Assets / Total Equity 11.67

  13. SWOT Analysis

  14. Strengths • Minimum Liquidity Risk • Asset Turnover Rate is slightly higher than market • Operating Profit Margin is slightly higher than market • 2009 ROA & ROE is higher than market • Extremely low solvency risk as indicated by low leverage ratios

  15. Weaknesses • Firm currently has a Low Return on Equity but we consider this temporary • Sub-optimal use of working capital. However, an expansion could help remedy this • EPA regulations • Relatively high feed costs

  16. Opportunities • Rightward shift in demand curve for beef • Growth of ethanol production is helping corn belt cattle feeders • Ethanol byproducts (ddg) can be a cheaper alternative to corn

  17. Threats • Market currently has extremely low ROE • JBS Processing Plant might go out of business • Production Risk • Input Cost Risk • Volatile cattle prices: Live cattle futures hedging can mitigate this risk • Potential regulation: In Iowa, feedlots with 1,000 or more head must adhere to run-off regulations

  18. Problem Statement • The nature of the capital budgeting problem • What • Why • How

  19. ATCF’s • ATCF’s • Initial Investment • Team 15’s investment total of $675,000 is derived from Iowa State University’s Beef Feedlot Manual. (Pg. 22, Lawrence, Shouse et al). The investment is an approximate figure computed from the university’s approximate initial investment for a total confinement facility with a solid floor. Team 15’s initial investment figure is an approximate amount because the team does not have the necessary data to form an exact estimate concerning the initial investment cost. The team had to form an approximate investment cost given the data in table 13 of the aforementioned ISU Beef Feedlot Manual. Team 15 averaged the data found in the table between a complete confinement facility with 1,500 head and 750 head to compute a $691,335 initial investment for a 1,250 head facility. Our facility is 250 head smaller than the that so the $691,335 figure was too high. The team sought to develop a more accurate figure and consulted Dr. Black who considered $675,000 to be a fair estimate for an initial investment for a Michigan cattle feedlot. (Black, 2011) Thus, we arrived at an acceptable initial investment figure.

  20. ATCF’S pt 1 • Initial Investment

  21. Risk Assessment

  22. Internal Risk Financial Risk Decrease in liquidity Increase in leverage Volatile cash flow/ROE generation could hinder ability to repay large loan Michigan feedlots require cover Securing financing from a company like Greenstone Rising costs related to fuel, labor, and supplies Disaster Risk Death or Illness of farmer(s)

  23. External Risk Macroeconomic changes Decrease in demand for beef Production Risk Natural disaster Shortage of cattle inventory Volatile cattle prices Feed prices increasing JBS processing plant putting down EPA legal action

  24. Computing a Discount Rate • Team 15 is using a discount rate of 12.5%. This discount rate approximates the firm’s opportunity cost of capital with internal and external risks added in. It is impossible for this discount rate to account for ‘black swan’ events.

  25. Recommendation and Summary

  26. Notes(temp) • Keep appendices at the end of each section • Common size last three years of balance sheet • Cost structure on page 16 of pdf per steer x number of steer turns • FAPRI—Missouri, Texas a&m, iowa state • Keep increasing discount rate until it gets to zero for sensitivity analysis • High estimate of cash flow, medium and low: three scenarios of what project might look like • Action items: determine how many cattle and hogs are on farm for 2008 and 2009 • 2009: Fin Yearling, Steer Str 1,132 Head • 2008: Fin Yearling, Steer Str 1,205 • Total Crop Acres: 2,897 acres—only 663 owned • Corn, CORN GROWN 2008 56,703 bu • Corn, CORN GROWN 2009 35,799 bu

  27. Other Current Assets Operating Income Fixed Assets Inventory Assets Current Assets Asset Turnover Accounts Receivable Return on Investment Operating Income Cash and Equivalents Earning before Interest and Tax Operating Expenses Profit Margin Operating Income Non-Operating Expenses

  28. Other Current Assets Operating Income Fixed Assets Inventory Assets Current Assets Asset Turnover Accounts Receivable Return on Investment Operating Income Cash and Equivalents Earning before Interest and Tax Operating Expenses Profit Margin Operating Income Non-Operating Expenses

  29. Other Current Assets

  30. Inventory

  31. Accounts Receivable

  32. Cash and Equivalents

  33. Fixed Assets

  34. Current Assets

  35. Operating Income

  36. Operating Expenses

  37. Non-Operating Expenses

  38. Operating Income

  39. Assets

  40. Earning before Interest and Tax

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