Understanding the cost of capital Agricultural businesses rely on borrowed capital for inputs, machinery, equipment, and land Managing debt capital requires a farmer to choose from among multiple financing sources offering differing interest rates, rebates, points, and other non-interest costs. –Debt can increase the rate of growth in equity capital –Debt will increase risk of equity loss

Financing decision aids Short-term financing alternatives –Trade credit –Credit cards/Lines of credit Intermediate-term financing alternatives –Machinery and equipment loans Long-term financing alternatives - Real estate loans

Design Considerations Developed to be easy to use and flexible to encourage producers to compare financing alternatives Uses Microsoft Excel  and Visual Basic for Applications (VBA) so that is readily available to a wide range of users Macros are used to prevent accidental corruption of code by user

Short-term Financing Module Uses the economic concept of opportunity cost and the financial concept of time value of money to determine the cost of capital from supplier financing. Many agricultural input suppliers offer terms of sale that offer cash discounts for early payment. Such terms of sale typically have a very high implicit cost of capital.

Example of short-term financing alternative

Intermediate-term Financing Module Uses time value of money concepts for machinery and equipment purchases. Alternative sources of financing have different interest rates and non-interest costs. Dealers often offer a choice between rebate dollars or lower interest rates.

Example of intermediate-term financing alternative

Long-term Financing Module Different lenders often have different terms, interest rates, and non-interest costs. Many lenders also allow borrowers to pay points to lower their interest rate. Also important are any stock requirements such as that required by the Farm Credit System (still working on impact of patronage dividends on cost of capital).

Example of long-term financing alternative

Potential farm decision analysis tools: Leasing options calculator –Will help farmers understand the risks inherent in leasing farm assets including options to buy in leveraged leases Contracting options calculator –Designed to analyze the risks associated with typical production contracts including those common in poultry and swine production On-farm methane digester capital budgeting model –Will assist producers considering the implementation of an on- farm methane digester and would help them evaluate the risk associated with bearing a large and irreversible investment