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Slide Show #15

Slide Show #15. AGEC 430 Macroeconomics of Agriculture Spring 2010. Handout #24. Project is economically feasible since the NPV > 0. NPV = NCF1 / (1+R) + …. – C. Here, NPV = 1,750 / (1+R) + … - C. If a startup investment, then NPV = 8,250 / (1+R) + … - C. A measure of business risk.

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Slide Show #15

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  1. Slide Show #15 AGEC 430 Macroeconomics of Agriculture Spring 2010

  2. Handout #24

  3. Project is economically feasible since the NPV > 0.

  4. NPV = NCF1 / (1+R) + …. – C. Here, NPV = 1,750 / (1+R) + … - C If a startup investment, then NPV = 8,250 / (1+R) + … - C

  5. A measure of business risk A better measure of business risk

  6. This equation is an enhancement of equation (2) since it allows for the presence of changing business risk exposure over the economic life of the investment.

  7. Leverage ratio

  8. Therefore the required rate of return to use in the NPV model is in a given year is given by: RRR = risk free rate + business risk premium + financial risk premium

  9. NPV Model for Our Class NPV = NCF1/(1+R1) + NCF2 /[(1+R1)(1+R2)] + … + Tn/[(1+R1)(1+R2)…(1+Rn)] - C where: NCFi = net income + depreciation in the ith year Ri = required rate of return reflecting interest rate and both business and financial risk premium in the ith year Tn = terminal value at the end of the economic life C = cost of the investment project For the purposes of our course, you are simply asked to assume a total risk premium that fits your teams attitude towards risk and your perceived exposure to risk. All calculations are handled by the model.

  10. Presentation Model • The model given to each presentation team should reflect your team’s aversion to risk. • It will calculate the risk-adjusted net present value for you. • Your task will be to interpret the change in the net present value as conditions change in the Lower Slobovian economy.

  11. Since NPV > 0, the investment is deemed economically feasible.

  12. The impact of your shock is captured here.

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