Front Cover
 Table of Contents
 Preparing the capital budget
 Analyzing the capital budget
 Back Cover

Group Title: Circular
Title: Capital budgeting for a new dairy facility C.V. Thomas, M.A. DeLorenzo and D.R. Bray
Full Citation
Permanent Link: http://ufdc.ufl.edu/UF00008571/00001
 Material Information
Title: Capital budgeting for a new dairy facility C.V. Thomas, M.A. DeLorenzo and D.R. Bray
Series Title: Circular
Physical Description: 21 p. : ill. ; 28 cm.
Language: English
Creator: Thomas, Craig V ( Craig Vincent ), 1951-
DeLorenzo, M. A
Bray, D. R ( David Russell ), 1940-
Florida Cooperative Extension Service
Publisher: University of Florida, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences
Place of Publication: Gainesville
Publication Date: 1994
Subject: Dairy barns -- Finance   ( lcsh )
Dairying -- Capital investments   ( lcsh )
Genre: government publication (state, provincial, terriorial, dependent)   ( marcgt )
bibliography   ( marcgt )
non-fiction   ( marcgt )
Bibliography: Includes bibliographical references (p. 9).
General Note: Cover title.
General Note: "February 1994."
 Record Information
Bibliographic ID: UF00008571
Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: ltqf - AAA6835
ltuf - AKA2277
oclc - 30691982
alephbibnum - 001926316

Table of Contents
    Front Cover
        Front Cover
    Table of Contents
        Table of Contents
        Page 1
    Preparing the capital budget
        Page 2
    Analyzing the capital budget
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
        Page 9
        Page 10
        Page 11
        Page 12
        Page 13
        Page 14
        Page 15
        Page 16
        Page 17
        Page 18
        Page 19
        Page 20
        Page 21
    Back Cover
        Page 22
Full Text


February 1994

Circular 1110

Capital Budgeting for a New Dairy Facility

C. V. Thomas, M. A. DeLorenzo and D. R. Bray

University of Florida
Florida Cooperative Extension Service
Institute of Food and Agricultural Sciences
John T. Woeste, Dean


Table of Contents


Introduction 1

Preparing the capital budget 2

Estimating capital expenditures 2

Estimating cash flows 3

Analyzing the capital budget 3

Investment analysis tools 5

Using spreadsheets as an analysis aid 7

Dealing with risk 8

References 9

Exhibits 11

I t G
0 iv

Capital Budgeting for a New Dairy Facility1

C. V. Thomas, M. A. DeLorenzo, and D. R. Bray2


Dairy production throughout the United States
has changed tremendously over the past twenty years.
The trend in every major dairy region has been
toward larger and more technologically sophisticated
dairy farms. Florida has been a leader in this trend
with average herd size increasing from 300 cows/herd
to over 500 cows/herd in the past twenty years. In
fact, most growth in the Florida dairy industry during
the past five years has occurred due to the
establishment of new herds in excess of 1,000 cows.
The trend of increased herd size is expected to
continue in the future.

The Florida dairy industry has also been a leader
in technological change. Major improvements and
innovations have taken place in dairy cattle housing;
environmental modification to reduce heat stress;
milking parlors; feeding systems; and waste
management systems. Many of these technological
advances have also encouraged the trend of larger
herd sizes since they are often most profitable when
applied on a large scale.

Both factors, increased herd size and increased
technological sophistication, have resulted in dairy
production becoming an even more capital-intensive
agribusiness. The capital-intensive nature of dairy
production, coupled with its often low operating
margins, makes it essential to formulate a realistic
capital budget. Such a budget is a systematic
evaluation of the dairy investment's capital
expenditures and operating cash flows.

The difficulty of the capital budgeting task can be
managed by following three basic steps. Step one:
determine the capital expenditures of the investment
(e.g., cost of land, cattle, buildings, etc.). Step two:
estimate the cash flows (i.e., revenues and expenses)
the investment will generate over its expected life.
Step three: combine the information gained in the
first two steps and analyze the feasibility of the
investment. This publication will present an example
capital budget built on a computer spreadsheet
program, with a subsequent analysis of its feasibility
for a new 1,200 cow dairy operation in north Florida.
The hypothetical dairy in this publication purchases
all replacements. Its crop land and farming operation
are designed to meet current waste disposal

Before starting the capital budgeting process, it is
important for the potential dairy investor to consider
long range goals. A realistic evaluation of the project
will be determined not only by the data generated
from the budgeting process, but also by the attitude of
the potential investor. The potential dairy investor
should answer these questions: Am I entering the
dairy business to purely maximize the return from my
investment? Or, is my search for profits tempered by
a desire for a lower, more stable level of "satisfactory
profits" that will, hopefully, result in a better prospect
of long term survival for the business? Honest
answers to such questions will affect decisions
throughout the entire capital budgeting process.

1. This document is Circular 1110, Dairy Science Department, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences,
University of Florida. Publication date: February 1994.
2. C. V. Thomas, research assistant; M. A. De Lorenzo, associate professor; and D. R. Bray, Extension agent III; Dairy Science Department,
Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida, Gainesville FL 32611.

Capital Budgeting for a New Dairy Facility


The first step in the capital budgeting process
involves defining, categorizing, and estimating the cost
of capital expenditures. In our example capital
budget we consider four main categories of capital
expenditures: 1) real estate; 2) cattle; 3) construction;
and, 4) miscellaneous equipment. A complete
breakdown of these categories and an estimation of
their costs for a 1,200 cow free-stall dairy with a
double-20 herringbone milking parlor are given in
Exhibit 1.

Estimating capital expenditures

Capital expenditures, or investment costs, include
all costs to bring the project into operation. They
include the four main expense categories plus
consulting fees, legal fees, permit fees, etc. In order
to formulate an accurate estimate of capital
expenditures, the potential dairy producer must work
together with other industry professionals to form a
design team. These professionals may include
university Extension personnel, construction
contractors, milking equipment dealers, soil/water
district personnel, financing/banking officers,
consulting engineers, attorneys, etc.

The dairy producer and the design team must
view the capital budget as an evolutionary process
that passes through several stages before it is
finalized. Four distinct phases may be identified for
most cost category estimates:

* Per animal unit cost estimate. This estimate
usually is the first part of the budget process. It is
used to establish a preliminary design budget and
usually has a relatively low accuracy of 20%. In
some cases, the accuracy of this estimate can be
improved if it is based on actual cost data of an
actual recent project. For example, in Exhibit 1,
section III.G, the cost estimate for the free-stall
housing is stated on a per animal unit basis;
however, this data is accurate since it is based on
actual barns recently built in Florida and the

Preliminary design cost estimate. This estimate
applies to the construction portion of capital
expenditures and is based on such things as
number of square feet (SF), cubic yards (CY),
linear feet (LF) of materials. This phase of the
budget forces the design team to consider
production strategy (e.g., milking frequency,

replacement rate, feeding regime, level of
mechanization, waste handling method, etc.) and
to calculate approximate sizes of buildings,
manure storage area, etc. Typically such
estimates are 15% of actual costs. Working
with construction contractors who have previous
dairy construction experience may improve the
accuracy of these estimates.

Complete systems cost estimate. In dairy
construction, these estimates are usually provided
by specialized equipment dealers which supply
and install many of the sub-systems outside the
realm of expertise provided by the general
contractor. Items included would be milking
equipment, milk refrigeration systems, manure
pumps, irrigation equipment, etc. In most
locations, dairy producers seek competitive bids
from several dealers. In this case the information
should be accurate within 2 to 10%.

Detailed per unit cost estimate. This phase
consists of a competitive bid from the general
contractor and produces a complete, line-by-line,
listing of all material quantities, labor costs, and
equipment costs. This method requires complete
plans and specifications for the project and is
accurate to within 5%.

Due to the limited information available on dairy
construction projects, many of the categories of cost
estimates will not be highly detailed. Thus, most
dairy project planners will have to rely, at least in
part, on per animal unit cost estimates or preliminary
design cost estimates for some portions of the
proposed project. Exhibit 1 is a listing of the items
that should be considered as a minimum. The costs
given for each item are the best available at the time
of publication for north Florida. The cost figures also
reflect the current requirements for waste disposal
(e.g., manure storage and handling, crop land for
waste disposal). Readers of this publication are
warned, however, that these figures may, or may not,
apply to dairy projects they may be planning. Costs
of capital items can change rapidly, waste
management regulations are subject to change, and
different management strategies (e.g., raised
replacements) alter items included in the budget.
However, follow the basic method of constructing and
analyzing a capital budget outlined in this publication
if you are considering an actual project. Furthermore,
you should consider the cost categories given and
seek up-to-date information that is relevant to your

Page 2

Capital Budgeting for a New Dairy Facility

management strategy, geographical area, etc. before
making a final decision.

Two final topics related to capital expenditures
also deserve mentioning: capital replacement costs
and salvage value of replaced capital. These two
areas are important since many portions of the dairy
investment have differing lengths of useful life. For
example, in considering the 20-year life of the entire
project, some items (e.g., milking equipment) will
have to be replaced once, or even several times,
during the project's life. Therefore, it is critical to
accurately predict useful life of system components
and accurately project replacement costs.
Furthermore, since replacement of some capital items
is anticipated, it is important to establish accurate
salvage values for those items. It is critical to
realistically determine if a market exists for replaced
capital items or if past history shows that these items
end up rusting behind the farm shop.

Estimating cash flows

The next step in the capital budgeting process is
estimating the expected cash flows (i.e., cash revenues
and cash expenses) that the project will generate
throughout its expected life. This can be more'
difficult than estimating capital expenditures.
Estimating cash flows requires a detailed analysis of
the day-to-day operation of the business and
proficiency in the technical aspects of dairy
production. Even with the best of planning, the
timing and magnitude of future cash flows will remain
uncertain over the entire life of the project.
Therefore, methods of dealing with these
uncertainties, like "what-if" analyses using
spreadsheets or simulation modeling, should be

The first step in estimating cash flows involves the
identification and quantification of all revenue and
expense categories. Within each revenue and expense
category it is necessary to identify the
revenue/expense driver. A revenue or expense driver
is any factor whose change causes a change in total
revenues/expenses. For example, important revenue
drivers are number of cows and milk sold per cow.
Common expense drivers include number of cows,
culling rate, number of employees, etc. Table 1
shows the revenue and expense categories chosen for
this example spreadsheet analysis and gives a brief
explanation of each revenue/expense category and its
associated revenue/expense drivers.


A sound analysis of the capital budget should
consider both its cash flow and profitability. Analysis
of the project's cash flow seeks to answer the
question: "Can I pay for this project?" Thus, the cash
flow analysis determines whether the dairy investment
can generate adequate cash to meet periodic
obligations to claimholders who have contributed
capital to the investment (e.g., owner equity, bank or
other financial institution). Profitability seeks to
answer a broader question: "Is this project a wise
investment?" Therefore, analysis of the project's
profitability determines how favorably the dairy
investment compares to other investment
opportunities available for the same capital. A sound
analysis of any investment must consider both of these
aspects because an investment may be profitable but
not feasible from a cash flow standpoint and vice

When considering the profitability of an
investment, two important and related concepts must
be understood: 1) time value of money; and, 2) timing
of cash flows. The capital invested in the dairy facility
is tied up by the project for a particular period of
time and unavailable for investing in some alternative
investment. Therefore, the time value of money
accounts for income that must be sacrificed from an
alternative investment over this period. The income
sacrificed is often referred to as an opportunity cost.
In other words, by tying up capital in the dairy the
investor must forego the opportunity of income from
other investments.

Timing of cash flows is related to the time value
of money since the further into the future a cash flow
is realized the less value it has today. Thus, the
absolute value of revenues (positive cash flow) or
expenses (negative cash flow), in terms of present
worth, decreases the further into the future they are
expected to be realized. Furthermore, the impact of
cash flows on today's decisions should decrease as
those cash flows extend further into the future.

The process of accounting for opportunity costs
due to the time value of money is accomplished by
discounting future cash flows. Cash flows are
discounted, or reduced, by using a discount factor
whose effect becomes greater the further into the

Page 3

Capital Budgeting for a New Dairy Facility

Table 1. Revenue and expense categories and their associated drivers.

Item Category explanation Revenue/expense driver

Gross revenue from milk sales

Gross revenue from cull cow sales

Gross revenue from selling all bull and
heifer calves at approximately one week
of age
Gross revenue from selling surplus
corn silage

Variable cash expenses
Purchased commodities




Vet & medicine



Coop dues



Fixed cash expenses
Principal payments

Interest payments



Cost of all feeds not produced on the dairy

Cost of all purchased corn silage

Cost of compensating all labor, including
office and management staff
Electricity costs

Cost of veterinary care, drugs, medicines,
biologicals, etc.
Cost of semen

DHIA production testing

Milk hauling costs
Membership dues for milk marketing coop
Assessment for dairy product advertising
Government milk assessment
Repair costs for all facilities and equipment
All variable crop production and harvesting
costs (e.g., seed, fertilizer, fuel, etc.)

Supplies (e.g., soaps & cleaners, office
supplies, etc.), fuel, oil, etc.

Principal payments for capital expenditures
and capital replacement

Interest payments for capital expenditures
and capital replacement

Accounting and other professional fees,
travel, postage, other misc. fixed costs
Insurance on real estate, facilities,
equipment, and cattle
Property tax assessed by local government


Cull cows



Herd size, milk sold per cow,
milk price
Culling rate, average weight of culled
cows, cull cow price
Average weight of calves, average
annual death loss, calf price

Acres grown, yield per acre, average
consumption, storage and feeding
losses, silage market price

Herd size, ration composition,
commodity prices
Acres grown, yield per acre,
average consumption, storage and
feeding losses, silage market price
Number of employees, average hours
worked per week, wage rate
Milk production, cost per cwt of
milk produced
Herd size, cost per cow

Herd size, services per conception,
semen cost per unit
Herd size, testing options, cost per
Milk production, cost per cwt
Milk production, cost per cwt
Milk production, cost per cwt

Milk production, cost per cwt
Herd size, cost per cow
Acres grown, per ton production and
harvesting costs; harvesting, storage
and feeding loss rate
Herd size, per cow application rate

Capital expenditures, capital replace-
ment, interest rates, and financing
Capital expenditures, capital replace-
ment, interest rates, and financing
Herd size, per cow application rate

Herd size, per cow cost

Herd size, per cow cost

Page 4

Property tax

Capital Budgeting for a New Dairy Facility

Table 1 (continued). Revenue and expense categories and their associated drivers.
Item Category explanation Revenue/expense driver

Fixed non-cash expenses
Depreciation1 Amortization of initial and replacement Capital expenditures, capital replace-
capital assets ment, depreciation method, expected
useful life (EUL)
Loss (gain) on culled Losses or gains due to differences in cow Replacement price, cull price, depre-
and dead cows2 salvage revenue and cow book value ciation method, culling rate, death
loss rate
'Depreciation is a non-cash expense but potentially affects cash income by reducing taxable income.
2Loss on culled and dead cows is a non-cash expense but potentially affects cash income by reducing (losses) or increasing
(gains) taxable income.

future the cash flow is realized. An interest rate (i.e.,
discount rate) is used to calculate the discount factor
and should represent the expected rate of return from
an alternative investment of relatively the same size
and level of risk. Generally, the investor desires the
largest positive cash flows early in the investment's
life so capital from the investment can be recaptured
and reinvested. Reinvestment puts the money back to
work earning even more returns, thus reducing
opportunity costs.

The cash flow aspect of capital budget analysis
does not consider the time value of money. However,
the timing of cash flows is still very critical. The
magnitude of undiscounted positive cash flows must
be high enough each period to meet periodic
obligations to claimholders who have supplied capital
for the investment. If these obligations cannot be
met, foreclosure may result, even though in the long
term the investment might be profitable. Cash flow
problems of this nature are typical in the first stages
of a project when production is lowest and expenses
are usually at their highest.

Investment analysis tools

There are several tools useful in analyzing the
profitability of any investment. First, payback period
(PP) calculates the number of years to recapture the
initial investment in a project. If net annual cash
receipts are equal, PP is calculated as follows:

PP = Initial investment outlay
Annual net cash receipt

If the net annual cash receipts are expected to
fluctuate year-by-year, PP is calculated by summing
the net annual cash receipts until the initial
investment outlay is covered. Payback period is an

important consideration with many investors, and
widely used in agriculture; however, it has serious
limitations. First, it does not consider the time value
of money or the timing of cash flows. Therefore, PP
provides no information on long term investment
value between the proposed investment and other
investment alternatives. Furthermore, looking at PP
alone can often result in incorrect decisions because
PP does not consider the profit beyond the PP. For
example, one investment alternative may have a
longer PP than a competing alternative, yet in the
years exceeding its PP it may have several years of
positive net cash receipts greatly in excess of
alternative investments with shorter PPs. If the
investment decision is made solely on PP, alternatives
with shorter PPs would be chosen and long-run profit
would be sacrificed.

A second method of analyzing the profitability of
capital investments is simple rate of return (ROR).
The general equation for ROR is:

ROR = Estimated average annual return
Initial investment outlay

Again, many investors are concerned with the
ROR of a proposed investment. However, as with
PP, ROR does not consider the time value of money
or the timing of cash flows. It also does not consider
the size of competing investments or their length.
For example, would you rather have a return of 25%
on $1 for one year, or 15% return on $1 million for
ten years? The answer is obvious, and shows the
limitation of relying only on ROR as a decision
criteria for competing investments. A final

consideration for ROR is exactly what number to use
in the numerator. Firms commonly use estimated
average annual net profit (after deducting
depreciation). However, modified versions of ROR
use a variety of measures of return in the numerator,

Page 5

Capital Budgeting for a New Dairy Facility

depending on the purposes of the analysis. For
example, we have chosen to use after-tax, net cash
flow (estimated cash income) as the numerator in
analyzing the dairy investment. This method of
calculating ROR indicates to the potential dairy
investor the actual "in-pocket" ROR from the

A third method of analyzing the profitability of
capital investments is called the net present value
(NPV) of the investment. This method has the
advantage of considering the time value of money,
differences in the timing of cash flows for competing
investments, and differences in competing projects'
size and length of useful life. The general calculation
for NPV is given below.

As indicated in the NPV equation, this method
considers revenues, expenses, tax savings gained
through depreciation (depreciation tax shield), and
cost of the initial investment. This net present value
calculation reduces each competing investment to its
value in terms of after-tax, present dollars. The
values for NPV may be positive, negative, or equal
zero. A negative NPV is telling you that the next best
investment alternative, which earns returns at the
selected discount rate, is a better investment;
therefore, any investment alternative with a negative
NPV represents a loss and should not be considered.
If competing investments must be reduced to only one
choice, the alternative with the highest positive NPV
will maximize profit.

NPV equals sum of [ Each year's tax adjusted revenue ]
1 Each year's discount factor J
minus sum of [Each year's tax adjusted expenses
1 Each year's discount factor
plus sum of [ Each year's depreciation tax shield ]
I Each year's discount factor

minus dollar amount of initial investment

Although NPV is the most sound investment
decision criterion, it also has its problems. The two
primary problems are the selection of the length of
planning horizon and of a legitimate interest rate
(discount rate) to be used. The length of planning
horizon for a dairy facility is typically 20 years.
However, it may be considerably reduced if the
entrepreneur considers external forces (e.g.,
technological change, government policy, market
conditions) that increase the risk of the investment.
A good rule of thumb for selecting the discount rate

would be to use the expected rate of return of an
investment alternative of relatively equal size and
level of risk. Another problem with NPV, which it
shares with all other investment analysis methods, is
providing realistic estimates of revenues and expenses.
The value of any investment analysis is only as good
as the estimates from which it is calculated.

A fourth method of analyzing the profitability of
capital investments is called the internal rate of
return (IRR) of the investment. This method has
many of the same advantages as NPV; it considers the
time value of money and differences in the timing of
cash flows for competing investments. The IRR is
defined as the discount rate the dairy investment
would have to earn in order for its NPV to equal
zero. Thus, if the IRR is greater than the discount
rate used in the NPV calculation, the dairy investment
is superior to the next best alternative investment. If
the IRR is less than the discount rate used in the
NPV calculation, the dairy investment is inferior to
the next best alternative investment.

Finally, to determine the cash flow feasibility of
the project we need to look at the magnitude of the
periodic cash flows. The magnitude of these cash
flows indicate the ability to meet periodic debt service
and other cash operating expense obligations.
Additionally, a breakeven analysis gives an indication
of how large the primary revenue drivers (herd size,
milk sold per cow, and milk price) must be in order
to have a breakeven (i.e., zero) net cash flow. For
example, a breakeven herd size of 1,350 cows
indicates the required number of cows that must be
milked at the selected milk sold per cow and milk
price to produce a zero net cash flow for the year.

The magnitude of these breakeven points is
particularly useful to the potential investor when a
yearly net cash flow is negative. In this situation, the
magnitude of the breakeven points gives the investor
an indication if there is a chance to break even if
production or market conditions were to change. For
example, if the projected milk price was $15.50/cwt
and the breakeven milk price was $15.75/cwt, there
might be some justification for optimism on the
investor's part that a breakeven cash flow for the year
could be generated. A positive fluctuation of 250 in
the milk price is within the realm of possibility.
However, if the breakeven milk price was $19.50/cwt.
the investor would have no optimism that an
adjustment in milk price would produce a breakeven
cash flow for that year.

Page 6

Capital Budgeting for a New Dairy Facility

As previously indicated, the accuracy of any capital
budgeting process is highly dependent on the accuracy
of the data used to formulate the budget. Therefore,
the importance of sound, realistic estimates for capital
expenditures, forecasted revenues and expenses,
discount rate, length of planning horizon, and other
input data cannot be overemphasized. All data used
in this example analysis represent the best estimates
of the authors at the time of publication. However,
these data should not be relied upon in an actual
budgeting situation. Each budgeting situation
demands collection of new data that best represents
the time, place, and circumstances involved.

Using spreadsheets as an analysis aid

Once you have collected all of the capital
expenditure and estimated cash flow information, it is
necessary to put it into a form so the capital budget
analysis can be completed. Excellent tools for
organizing and managing this information are
microcomputer spreadsheet programs. For our
example analysis of a 1,200 cow dairy, we have set up
a spreadsheet. (The spreadsheet template is available
in Microsoft Excel* for Apple Macintosh* computers
and for IBM compatible computers (requires
Microsoft Windows*). This spreadsheet has four
main areas that drive the calculations necessary to
analyze the project:

1. Capital expenditures (Exhibit 1): This information
is used directly in the analysis. When coupled
with additional input data, it provides information
necessary to calculate principal payments, interest
payments, and depreciation. These are necessary
to calculate estimated cash flows.

2. Input data (Exhibit 2): This area of the
spreadsheet provides the information on
revenue/expense drivers and financing necessary to
calculate estimated cash flows. Information is also
entered here that determines how the investment
will be retired and how the retirement value will
be determined.

3. Cash income statement (Exhibit 3): This area
produces an estimated cash income statement for
each year of the 20-year dairy investment. It is set
up in a contribution margin format (i.e., variable
and fixed cash expenses separated) so that a
breakeven analysis can be performed for each
year. In addition, each year can be expanded (see
year 20) to show cash revenues and expenses per

cow, per cwt, and a percentage analysis of cash
revenues and expenses.

4. Investment analysis summary (Exhibit 4): This
area gives a brief summary of the investment
analysis. It provides measures of profitability,
NPV, average ROR, and PP for the investment,
and a summary of estimated net cash income
(total and yearly). In addition, it shows the total
equity and debt capital required for the investment
and a breakeven analysis for herd size, milk sold
per cow, and milk price. Actual milk sold per cow
is also shown.

Secondary areas of the spreadsheet, not shown in
this publication, show the amortization schedule for
the original investment and capital replacement;
equipment and building depreciation schedule; cow
depreciation and gain/loss schedule; and a NPV
calculation table showing each year's discounted,
after-tax revenues, expenses, and depreciation tax

Exhibits 1 through 4 represent the results of an
example analysis. First, data on capital expenditures
was collected and entered into the appropriate areas
of Exhibit 1. Second, based on actual operating
information from four large Florida dairy farms (July
1991 June 1992), information on revenue/expense
drivers and prices was entered into Exhibit 2. Third,
interest rate information for financing the investment
was entered into Exhibit 2 based on current market
conditions. Additionally, term lengths of financing
and depreciation information and investment
retirement information was entered into Exhibit 2.
After all of this information was entered into these
two areas of the spreadsheet, the program
automatically generated the cash income statement
shown in Exhibit 3 (only years 1 to 5 and year 20 are
shown) and the investment analysis summary shown
in Exhibit 4.

The results of this analysis (Exhibit 4) indicate,
given the conditions and assumptions of the input
data (Exhibits 1 and 2), the dairy would be a sound
investment from a profitability standpoint with a
positive NPV of $1,996,159, an IRR above the
discount rate at 13.45%, and an "in-pocket" ROR of

However, the analysis also indicates the possibility
of cash flow problems during the first 2 or 3 years,
making the project's feasibility less certain. The
primary reasons for low initial cash flows are the


Page 7

Capital Budgeting for a New Dairy Facility

high principal and interest payments
due to 93% of the initial investment
being debt financed. The 80% debt
financing of livestock and
miscellaneous equipment, and their
five year amortization, is the primary
contributor to the problem. The
principal and interest payments due
to 93% breakeven analysis indicates
there should be no problem in
achieving a breakeven cash flow if
herd size, milk production, and milk
price reach projected levels. To
decrease the chance of cash flow
problems, the potential investor
should seek longer term lengths for
these loans and/or decrease the
amounts financed. If more favorable
terms were available for this portion
of the financing, another analysis
could be run by simply plugging the
new data into the input area (Exhibit
2) and recalculating the spreadsheet.

Dealing with risk

Obviously any financial investment
has risk associated with it. A primary
L C -: 1, 4t,

,UIIIUV IIIIII UL J l I&, I.) til^ tllltdlULt
associated with the magnitude of
potential net returns. Fortunately,
there are some techniques available
to deal with this aspect of risk
associated with the potential returns fr
investment. First, the uncertainty pr
from uncertainty about the accuracy ai
the data involved in producing the capital
budget and estimated cash flows. There
step in analyzing uncertainty is to run
"what-if scenarios of the proposed inve
the spreadsheet model. By plugging
values into the capital expenditure budg
and/or changing various values (e.g., I
cow, interest rates, discount rate, etc.)
affecting cash flows and financing (E
potential investor can discern the
investment value (Exhibit 4).

At a minimum, the potential da
working with the design team, should for
scenarios: 1) best case, 2) worst case,
likely case. For example, milk sold per
the most critical determinants of profit
Figure 1 shows the changes in NPV and


: A
1000 -


0 4.00-
2.00. -

-2.00- --
$4.00. - - - -

$3.00- -- --_
a o

.2 $2.00- -- -- -- -- ---__ ____- ---- --

> $1.00--- -
2 A
$0.00- ----- -- -- -

17,000 17,500 18,000 18,500 19,000 19,500 20,000 20,500 21,0
Milk Sold Per Cow (Ibs.)


Figure 1. A) Rate of return (ROR), and B) net present value (NPV) as affected by
milk sold per cow.

rom the dairy sold per cow changes. This graph makes it clear that,
imarily arises given the assumptions of Exhibits 1 and 2, the
id stability of investment is not feasible unless milk sold per cow
l expenditure exceeds 17,000 lbs/cow. Similar graphs could be made
:fore, the first for changes in milk price, interest rates, percent of
a variety of investment financed with debt, etc. In this way the
estment using investor could determine if acceptable NPV, ROR,
a variety of etc. are possible over feasible ranges of various input
;et (Exhibit 1) variables (e.g., milk sold per cow or milk price, etc.).
nilk sold per
in the inputs A second method of dealing with uncertain returns
exhibit 2), the is called simulation modeling. Simulation modeling
impacts on allows the analyst to specify the probability
distribution for one or all of the inputs to the
spreadsheet model. For example, probability
iry investor, distributions for various aspects of capital
rmulate three expenditures (e.g., land, construction, or equipment
and, 3) most costs) or cash flow inputs (e.g., milk sold per cow or
cow is one of milk price) could be specified. A probability
able dairying. distribution for an input simply describes the possible
ROR as milk values an input may take and the likelihood of each

Page 8

Capital Budgeting for a New Dairy Facility

value. A common probability distribution used in
business decision making is the triangular distribution.
To describe a triangular distribution for an input
variable, one simply must provide the lowest, highest,
and most likely value a variable might possibly take.
For example, the high, low, and most likely milk price
might be specified as $16.60, $13.60, and $15.60/cwt.

Once the probability distributions of inputs are
described, simulation modeling calculates the
spreadsheet repeatedly. Each time the spreadsheet is
calculated, a new value for each input, based on its
specified probability distribution, is used. After
numerous calculations, a range of output values can
be generated for one or more selected measures of
investment desirability (e.g., NPV, ROR, total net
cash flow). This process allows the analyst to make
probability statements about the output values (e.g.,
there is a 25% chance the NPV of the dairy
investment will be below $0).

Table 2, capital expenditures, shows the values
(low, high, and most likely) for milk sold per cow, and
milk price used in an example simulation of the
spreadsheet model. All other input values were kept
constant at those values shown in Exhibit 2. The
computer simulation program used in this example is
called @RISK" (available from Palisade Corporation,
31 Decker Rd., Newfield, NY 14867). This program
allows the user to specify the probability distribution
for any input variable in the spreadsheet capital
budget model and to forecast the value of any cell
dependent upon the value of one or more input
variables. The simulation was set to forecast total and
yearly undiscounted after-tax, net cash flows, IRR,
and NPV. Table 3 shows the results of the simulation

The minimum and maximum values in Table 3
indicate the range within which the analyst is 100%
sure the actual value will fall, given the assumptions
of the particular simulation. For example, the actual
NPV would never be expected to exceed $3,338,858
or fall below ($1,979,570). The mean value is simply
the average value. The simulated average NPV was
$1,192,013, which is over $800,000 lower than the
NPV obtained from the non-simulated spreadsheet
model of $1,996,159. The far right column in Table
3 shows the percentage of simulated values for each
measure that fell below zero. Thus, there is over a
13% chance that the NPV will be negative. The
simulation also shows that, given the milk sold/cow
and milk price assumptions, the cash flow situation
may be much more serious than the non-simulated

spreadsheet analysis indicated. The non-simulated
spreadsheet indicated a cash flow in year 1 of $15,715;
however, the simulation analysis (Table 3) indicated
that this cash flow could potentially go as low as
($600,839) and that there is only about a 2.7% chance
of it being positive. Furthermore, on average the
cash flows for years 1 through 5 will all be negative.

The advantages of simulation modeling lie in its
ability to handle a range of values for input data and
the calculation of multiple values for the measures of
investment value. For example, in the non-simulated
spreadsheet analysis the results were predicated on
the capital expenditures budget ($4,905,910), milk
sold per cow (19,300 lbs.), and milk price ($15.60/cwt)
being 100% accurate. Simulation allows more
freedom in specifying these input values and provides
additional information (e.g., range, percentiles,
probabilities, etc.) on the measures of investment
value (e.g., NPV, net cash flow, etc.). The addition of
two uncertain inputs to this model indicates that the
investment is much more risky than the original
spreadsheet analysis would have suggested. In the
end, this provides the decision maker with more
information with which to make the difficult
investment decision.


Aplin, R. D., G. L. Casler, and C. P. Francis. 1977.
Capital investment analysis using discounted cash
flows. Grid Publishing, Inc., Columbus, OH.

Daugherty, L. S., D. V. Armstrong, and W. T.
Welchert. 1989. Economic analysis of an
investment in a dairy facility. Proc. Am. Soc. Agr.
Eng., No. 4589. St. Joseph, MO.

Horngren, C. T. and G. Foster. 1991. Cost
accounting: A managerial emphasis. Seventh
edition. Prentice Hall, Englewood Cliffs, NJ.

Levy, H. and M. Sarnat. 1990. Capital investment
and financial decisions. Fourth edition. Prentice
Hall, Englewood Cliffs, NJ.

Luening, R. A., R. M. Klemme, and W. T. Howard.
1984. Wisconsin farm enterprise budgets -- dairy
cows and replacements. Univ. of Wisconsin CES
publ. A2731. Univ. of Wisconsin, Madison, WI.

Stickney, C. P., R. L. Weil, and S. Davidson. 1991.
Financial accounting. Sixth edition. Harcourt
Brace Jovanovich, New York, NY.

Page 9

Capital Budgeting for a New Dairy Facility

Table 2. Variable Inputs for example simulation of capital budget model.

Variable Low High Most Likely

Milk sold/cow (Ibs)1 18,000 20,000 19,300
Milk Price(per cwt) $13.60 $16.60 $15.60

Capital expenditures2 5% + 10% No change

1A milk yield trend of +1.00%/year was included in the model. This means milk sold/cow increased 1.00% each
year (e.g., if year 1 = 19,300, year 2 = 19,493, year 3 = 19,688, etc.)
2Applies to each capital expenditure category in Exhibit 1. The most likely value equals the value listed for the
category in Exhibit 1, the low value equals the listed value less 5%, the high value equals the listed value plus

Table 3. Results of example simulation of capital budget model.

Range Percent below
Measure (min to max) Mean zero

Total, undiscounted ($3,953,952)
to $5,101,959 3.16%
after-tax net cash flow to $5,1019
Undiscounted, after-tax net cash flow
1 to ($109,412) 73.14%
5 to ($20,725) 52.82%
10 to $338,996 0.68%
20 to $398,974 0.00%
Internal rate of return to 11.62% 0.00%1
Net present value to $1,192,013 13.38%
1Probability of an IRR less than the discount rate (9.00%).

Page 10

Capital Budgeting for a New Dairy Facility

Exhibit 1. Capital expenditures
Unit Estimated
Quantity Description -Units Cost Cost
595 Land crops) per acre $1,400 $833,000
85 Land dry cows) per acre 1,400 119,000
40 Land dairy) per acre 1,400 56,000
Sub-total $1,008,000
Unit Estimated
Quantity Description Units Cost Cost
1,200 Cows per head $1,140 $1,368,000
Sub-total $1,368,000
A. Milking Barn (Includes office)
Unit Estimated
Quantity Description Units Cost Cost
10,240 Steel frame building (40'x256') complete with per sq ft $20.00 $204,800
parlor, pit, holding and wash pens
2,250 Pump & equipment room (45'x50') per sq ft 24.00 54,000
1,200 Office/employee and supply storage areas per sq ft 19.00 22,800
Sub-total $281,600
B. Parlor Equipment
Unit Estimated
Quantity Description Units Cost Cost
40 Stalls (Dbl. 20 Herringbone) per stall $1,200 $48,000
165 Cow wash system per sprklr 70 11,550
1 Crowd gate each 15,000 15,000
2 Flush valves each 2,500 5,000
Sub-total $79,550
C. Milking Equipment
Unit Estimated
Quantity Description Units Cost Cost
40 Claws, shells, pulsators, wash system per stall $550 $22,000
40 Automatic detachers per stall 1,200 48,000
1 Balance tank, vacuum & pulsator lines each 8,500 8,500
1 SS 3' milk line w/fittings, 2 receivers, etc. each 19,000 19,000
Sub-total $97,500

Page 11

Capital Budgeting for a New Dairy Facility

Exhibit 1. Capital expenditures (cont.)
D Milk Storaoe & Eauioment Rooms

Page 12

57$ 0,000

Unit Estimated
Quantity Description Units Cost Cost
2 6,000 gal milk tank each $35,000 $70,000
1 Two stage plate cooler w/chiller each 20,000 20,000
6 Refrigeration compressors for milk tanks each 3250 19,500
1 CIP system and milkhouse equipment each 12,000 12,000
2 Vacuum system (25 hp pumps w/all equipment) each 15,000 30,000
2 Heat recovery hot water heaters each 2,100 4,200
2 100 gal. hot water heaters each 1,250 2,500
1 Compressed air systems each 14,500 14,500
Sub-total $172,700
E. Water System
Unit Estimated
Quantity Description Units Cost Cost
2 Wells w/pumps, pressure tanks each $18,000 $36,000
30,000 Water tanks (3) (parlor flush, wash floor) gal. 0.50 15,000
1 20 hp jet wash pump (wash floor) each 5,000 5,000
5,000 Water distribution system per linear ft. 5.00 25,000
Sub-total $81,000
F. Electrical System
Unit Estimated
Quantity Description Units Cost Cost
1 Main & parlor service entrance each $20,000 $20,000
1 150 kw standby generator each 25,000 25,000
1 Waste lagoon, manure separator service each 3,800 3,800
Sub-total $48,800
G. Housing System
Unit Estimated
Quantity Description Units Cost Cost
1,200 Complete freestall system (includes building, Per cow $625 $750,000
stalls, electrical, flush system, water, concrete &
grooving, gates, fans, sprinklers, cable fencing,
lock-up stanchions, etc.)


Capital Budgeting for a New Dairy Facility

Exhibit 1. Capital expenditures (cont.)
H. Feeding System
Unit Estimated
Quantity Description Units Cost Cost
2 Bunker silos (concrete floor, sides, apron) each $27,000 $54,000
10,000 Commodity shed per sq ft 3.50 35,000
3,000 Machinery service/repair shop per sq ft 8.00 24,000
4,500 Machinery shed per sq ft 3.00 13,500
1 Scales each 8,500 8,500
Sub-total $135,000
I. Site Development

Unit Estimated
Quantity Description Units Cost Cost
10,000 Fencing gates per linear ft. $2.00 $20,000
85 Pasture improvement & water (dry cows) per acre 60 5,100
1,087 Waste pond excavation & lining per cubic yd. 110 119,570
40 Site leveling & shaping, roads per acre 2,250 90,000

Sub-total $234,670
J. Waste Management

Unit Estimated
Quantity Description Units Cost Cost
500 Concrete (apron, settling/sand trap basin) per cubic yd. $110 $55,000
1 Manure solids separator each 22,500 22,500
1 20 hp pump (for separator) each 7,500 7,500
1 40 hp lagoon pump each 18,500 18,500
1 4 arch, towable center pivot irrigation system each 27,500 27,500
1 Piping, valves, etc. each 12,500 12,500

Sub-total $143,500
K. Maternity and Calving Area

Unit Estimated
Quantity Description Units Cost Cost
12 Maternity barn (12 pens), springer lot per pen $775 $9,300
S12 Calf hutches per pen 300 3,600

Sub-total $12,900

_ ~

Page 13

Capital Budgeting for a New Dairy Facility

Exhibit 1. Capital expenditures (cont.)
Unit Estimated
Quantity Description Units Cost Cost
1 Feed truck w/weigh mixer each $70,000 $70,000
1 Front end loader each 55,000 55,000
1 Skid steer loader each 15,000 15,000
2 Silage trucks (also haul manure solids) each 17,500 35,000
1 Tools, shop equipment each 7,500 7,500
1 Misc. equipment (e.g. nuts & bolts, spare parts) each 4,000 4,000
2 Fuel tanks (gasoline, diesel) w/roof each 3,500 7,000
1 Silage chopper each 45,000 45,000
1 100+ hp tractor each 27,500 27,500
1 85 hp tractor each 18,500 18,500
1 Cultivating & planting equipment each 25,000 25,000
1 Bush-hog/mower each 2,000 2,000
1 Lawnmower each 250 250
2 Weed-eater (heavy duty) each 150 300
1 Gooseneck livestock trailer each 8,500 8,500
1 4wd pick up truck each 17,500 17,500
1 Herdsman's equip. (refrig., semen tank, etc.) each 3,000 3,000
2 Computer system (w/battery backup) each 4,000 8,000
1 Maternity & calf equipment each 750 750
(calf bottles, medicine, obs. chains, etc.)




Per Estimated
Description Cow Cost
Total real estate costs $840 $1,008,000
Total livestock costs $1,140 1,368,000
Total construction costs 1,698 2,037,220
Total misc. equipment costs 292 349,800
Consulting, legal & administrative fees 1.50% 60 71,445
Contingency allowance 1.50% 60 71,445

Page 14

$4,088 $4,905,910

Grand Total

Capital Budgeting for a New Dairy Facility

Exhibit 2. Input data
Herd size OK*1 1,200
Milk sold/cow (Ibs) 19,300
Milk price (per cwt) $15.60
Milk sold/cow trend? yes
Trend value (% milk sold per cow, per year) 1.00%
Cull cows
Culling rate (per year) 33%
Average cull cow weight (Ibs) 1,350
Cull cow price (per Ib) $0.40
Annual death loss 1.00%
Annual death loss 5.00%
Average bull calf weight (Ibs) 75
Bull calf price (per Ib) $0.65
Average heifer calf weight (Ibs) 65
Heifer calf price (per Ib) $1.60
Purchased commodities
Average cost (per cow/day)*2 $3.20
Market price (per ton, as-fed) $25.00
Average silage consumption (Ibs/cow per day, as-fed) 60.00
Replacement cost (per head) $1,140
Number of employees 22
Average hours worked/week 45
Wage rate (per hour) $10.30
Utilities (per cwt/year) $0.41
Vet & Medicine
Vet & Medicine expense (per cow/month) $3.65
Services per conception 3.20
Average semen cost (per unit) $6.00
DHIA (per cow/month) $1.06
Milk Marketing
Milk hauling rate (per cwt) $0.57
Coop dues (per cwt) $0.17
Advertising (per cwt) $0.15
CCC (per cwt) $0.05

Page 15

Capital Budgeting for a New Dairy Facility

Exhibit 2. Input data (cont.)
Facility repair (per cow/month) $7.61
Variable silage production (per acre/year) $249.63
Variable silage harvesting (per acre/year) $35.76
Silage yield (tons per acre, as-fed) 24.00
Silage storage and feeding losses (%, as-fed basis) 8.00%
Variable overhead rate (per cow/month) $3.33
Insurance (per cow/month) $2.05
Property tax (per cow/month) $1.10
Fixed overhead rate (per cow/month) $1.96
%Debt financed
Real estate 100%
Livestock 80%
Construction*3 100%
Misc. equipment 80%
Capital replacement
Parlor equipment 100%
Milking equipment 100%
Milk storage & eqpmt. room 100%
Water system 100%
Housing system 100%
Feeding system 100%
Waste mgmt. system 100%
Misc. equipment 100%
Terms & Interest rates II Term (yrs.) Rate
Real estate (1-20) 20 8.50%
Livestock (1-20) 5 9.00%
Construction (1-20) 20 8.50%
Misc. equipment (1-20) 5 9.00%
Capital replacement
Parlor equipment (1-10) 10 9.00%
Milking equipment (1-5) 5 9.00%
Milk storage & eqpmt. room (1-10) 10 9.00%
Water system (1-10) 10 9.00%
Housing system (1-10) 10 9.00%
Feeding system (1-10) 10 9.00%
Waste mgmt. system (1-10) 10 9.00%
Misc. equipment (1-5) 5 9.00%


Page 16

Capital Budgeting for a New Dairy Facility

Exhibit 2. Input data (cont.)

fl...g....---- . dl-

Replaced at
end of year


% of Initial

Capital replacement

Parlor equipment
Milking equipment
Milk storage & eqpmt. room
Water system
Housing system
Feeding system
Waste mgmt. system
Misc. equipment

Depreciation*4 SLN(yes) or EUL*6

SYD(no)?*5 (years)
Livestock (3) no 3
Parlor eqmt. (10) no 10
Milking eqmt.(5) no 5
Milk storage & eqpmt. room(10) no 10
Misc. equipment (3 or 5) no 3
Physical plant*7 (15 or 20) no 15
Capital replacement*8 no NA

Discount rate 9.00%
Income tax rate 34.00%
Investment retirement Total


Real Estate Option value*9
Does real estate have a retirement value (yes or yes
Did real estate appreciate (yes or no)? yes
Percent appreciation 25% $1,260,000
Does livestock have a retirement value (yes or yes
Enter retirement value ($/cow) $1,200 $1,425,600
Fixed Assets* 0
Do fixed assets have a retirement value (yes or yes
Fair market value equals X% of original 25% $596,755

Page 17


Capital Budgeting for a New Dairy Facility Page 18

Exhibit 2. Input data (cont.).
*1 This message tells user if herd size in capital expenditures (Exhibit 1) matches (OK) herd size in cash income
calculations (Exhibit 3).
*2 Enter average cost per day necessary to produce initial milk sold per cow. If milk yield trend is selected, this
component of feed cost is automatically increased to meet increased milk production.
*3 Consulting, legal & administrative fees and contingency allowance are amortized as a construction cost.
*4 Enter "yesl for straight-line depreciation, enter "no" for sum-of-the-year's-digits depreciation.
*5 SLN = straight line depreciation, SYD = sum-of-the-years'-digits depreciation.
*6 EUL = expected useful life.
*7 Physical plant = milking barn, water, electrical, housing, feeding system, and waste management system; site
development; maternity area; consulting, legal, administrative fees; contingency allowance.
*8 Capital replacement does not include replaced misc. eqpmt. Misc. eqpmt. that is replaced is depreciated
*9 Retirement values are undiscounted and before tax. Retirement values are adjusted for capital gains/losses,
taxes and time value of money in IRR and NPV calculations in Exhibit 4.
*10 Fixed assets includes all buildings and equipment.

I f rr I- I I I Y

COO 'CC I '* IC I 'Q4', I *'I

CCbI'rI ',*C

ICO 171 I'C

07*1 1 j0*1 it 100'171'
ooolco i lot I en a lo6 i It-4b 046cloo 1 106
I I 1 11 1 1 22--J 4 %.P







L08'69 1

t,89'60 1



0 9 8z9L$


*,89'60 1


LL6 '0*


Z L 9'86










t,89'60 L

9 L L'O,

999'1 L






969' L..



O 1.'99',
SS'Z0f' l$

L08'69 1

$,89'60 1

089' L



009' 10'l$

111on nina. S aal nsn, IS4I-I Es*SJ


senp dooo
Bulle|Jeln )II!I
euiolpel g lea
setl!powuwoo peseIojlnd


0000L 00000L S99'9K 9988'e$ 9LZ'699',tt 060'tgO't*$ 898'9L0't, 900'086'Ct LL'9C,6'Ct 988'L06'Ct enueAeU 1910eO
00'0 00'0 00'0 0 0 0 0 0 0 0 e6el!S
L8' 1 L'8'OL '0 CL 890'L8 890'L8 890'L8 890'L8 890'L8 890'L8 se9A1B
S1'1 Sg', ,L'O ELl 098'LOZ 099'L0Z 09e'LOZ 09e'L0Z 09C'Z0Z 09C'LZ0 SMOo Ilno
89'T6 899'6 09'S9. LZ9'C$ 6t,8'9V'1,$ Z99'69L'e$ LI'ZZ'Me 8L9'989'C$ 060'6t,9'C$ 096'ZL9'te$ YIInN
===== ==================== = Si3nN3A3EI
AjoBeBI enueeAB IMO jed Moo Jed OZ s 9 2 V. UV3A
1o % 10 % II
lueuwelB9s eujoou! 4seo3 -e lq!Lx3

,'I I

lai i*

0' L


nn'nn I




06'9 L






99' .





g14 1 InA I *#J.


O C'121C'0 I 711 >' &I *

Exhibit 3. Cash income statement count) .
%of %of
YEAR 1 2 3 4 5 20 per cow percwt Revenue Category
Principle payments $295,526 $321,794 $350,398 $381,546 $415,465 $405,071 $338 $1.45 $8.69 78.88
Interest payments 394,671 368,403 339,799 308,651 274,733 34,904 29 0.12 0.75 6.80
Overhead 28,224 28,224 28,224 28,224 28,224 28,224 24 0.10 0.61 5.50
Insurance 29,520 29,520 29,520 29,520 29,520 29,520 25 0.11 0.63 5.75
Property tax 15,840 15,840 15,840 15,840 15,840 15,840 13 0.06 0.34 3.08
Total Fixed Cash Expenses $763,781 $763,781 $763,781 $763,781 $763,781 $513,559 $428 $1.84 11.02 100.00
Total Cash Expenses $4,064,616 $4,073,668 $4,082,831 $4,092,108 $4,101,498 $4,006,481 $3,339 $14.32 85.99
Cash Income, before taxes ($157,229) ($130,151) ($102,825) ($75,240) ($47,408) $652,796 $544 $2.33 14.01
Depreciation Expenses
Livestock $360,000 $280,800 $228,500 $194,000 $194,000 $194,000 $162 $0.69 4.16 74.63
Construction 307,159 280,819 254,480 228,141 201,801 0 0 0.00 0.00 0.00
Equipment 174,900 116,600 58,300 0 0 0 0 0.00 0.00 0.00
Capital replacement 0 0 0 0 0 8,569 7 0.03 0.18 3.30
Loss (gain) on culled 128,880 75,080 57,380 57,380 57,380 57,380 48 0.21 1.23 22.07
& dead cows
Total fixed non-cash expenses $970,939 $753,299 $598,660 $479,521 $453,181 $259,949 $217 $0.93 5.58 100.00
TAXABLE INCOME $0 $0 $0 0 $0 $797,917 $665 $2.85 17.13
Income tax $0 $0 $0 $0 $0 $271,292 $226 $0.97 5.82

NET CASH INCOME ($157,229) ($130,151) ($102,825) ($75,240) (47,408) $381,504 $318 $1.36 8.19
***Break-even Analysis**
Herd size 1,511 1,446 1,387 1,331 1,279 807
Milk sold/ cow (Ibs) 20,140 20,188 20,237 20,287 20,337 21,279
Milk price (per cwt) $16.28 $16.16 $16.04 $16.01 $15.80 $14.24

Capital Budgeting for a New Dairy Facility

Exhibit 4. Investment analysis summary.
1. Total, after-tax, net cash $7,157,454 2. Average ROR1: 6.71%
3. Sources of initial invested %
Debt $4,562,350 93
Equity $343,560 7
4. Yearly, after-tax, net cash 5. Breakeven analysis2
Herd size Milk/cow Milk Price Actual Milk Actual Milk
Sold/Cow Price
Year 1 $15,715 1,176 19,216 $15.53 19,300 $15.60
Year 2 $42,793 1,136 19,264 $15.42 19,493 $15.60
Year 3 $70,119 1,099 19,313 $15.30 19,688 $15.60
Year 4 $97,704 1,064 19,363 $15.19 19,885 $15.60
Year 5 $95,678 1,071 19,573 $15.20 20,084 $15.60
Year 6 $430,797 637 17,983 $13.83 20,285 $15.60
Year 7 $427,782 657 18,202 $13.86 20,487 $15.60
Year 8 $424,554 677 18,424 $13.89 20,692 $15.60
Year 9 $420,945 697 18,650 $13.92 20,899 $15.60
Year 10 $427,199 703 18,826 $13.91 21,108 $15.60
Year 11 $456,739 684 18,879 $13.81 21,319 $15.60
Year 12 $452,287 703 19,116 $13.85 21,532 $15.60
Year 13 $447,498 721 19,357 $13.89 21,748 $15.60
Year 14 $442,326 739 19,602 $13.92 21,965 $15.60
Year 15 $446,633 747 19,799 $13.92 22,185 $15.60
Year 16 $492,555 713 19,775 $13.77 22,407 $15.60
Year 17 $491,731 726 20,004 $13.79 22,631 $15.60
Year 18 $490,363 739 20,238 $13.81 22,857 $15.60
Year 19 $488,388 752 20,477 $13.84 23,086 $15.60
Year 20 $495,647 756 20,669 $13.83 23,317 $15.60
6. Payback period 6.50
7. Internal rate of 13.45%
return (IRR)4
8. Net resent value $1,996,159

*1 Average ROR bases return on average, undiscounted, after-tax, net cash flow. Investment outlay equals total initial investment
plus the present value of all replaced capital.
Break-even points based on inputs required to produce a net cash income of $0. If break-even herd size gives the message
'NO B.E. PT.!", there is no break-even point due to a negative contribution margin per cow.
3 Payback period calculated to nearest half year. Annual cash receipt for PP adjusted for income taxes but not for principal
or interest payments. Investment value for PP includes only the total initial investment, no capital replacement is considered.
If cell contains the message "NO PPI", the PP is not reached by the end of year 20.
*4 IRR and NPV are after-tax. In both calculations investment outlay equals total investment plus the present value of all
replaced capital. Retirement values (adjusted for capital gains and income taxes) for real estate, livestock, and fixed assets are
Included if the investment retirement options are selected in Exhibit 2.

Page 21

T. Woeste, Director, in cooperation with the United States Department of Agriculture, publishes this information to further the
purpose of the May 8 and June 30, 1914 Acts of Congress; and is authorized to provide research, educational information and
other services only to individuals and institutions that function without regard to race, color, sex, handicap or national origin.
Single copies of extension publications (excluding 4-H and youth publications) are available free to Florida residents from county
extension offices. Information on bulk rates or copies for out-of-state purchasers is available from C.M. Hinton, Publications
Distribution Center, IFAS Building 664, University of Florida, Gainesville, Florida 32611. Before publicizing this publication, editors
should contact this address to determine availability. Printed February 1994

University of Florida Home Page
© 2004 - 2010 University of Florida George A. Smathers Libraries.
All rights reserved.

Acceptable Use, Copyright, and Disclaimer Statement
Last updated October 10, 2010 - - mvs