ABM251 - AgribusinessPlanning&Analyss (1) - 1

ABM 251:
Agribusiness Planning & Analysis

Lecturer:
Dr. (Mrs) Gifty Boakye Appiah

Dept. of Agric. Econs., Agribus. & Ext.
KNUST, Kumasi
ABM 251: Agribusiness Planning & Analysis 1

Course Outline
Course Description:
• Success related to extent of planning and analysis of activities
• Quality planning depends on the manager’s understanding of
the business and its environment.
• In a rapidly changing environment, managers need the
requisite knowledge and skills of planning for effective and
efficient (agribusiness) project management
• This course focuses on the definition and scope of
(agribusiness) planning, preparation of a business plan, use of
the logical framework approach in project analysis, and the
concept of time value of money and capital budgeting as tools
for business decision making in both the short- and long-
term.

Course Outline Cont.
Course Objectives:
• The overall objective of this course is to equip students with
the requisite knowledge and skills for effective business
planning and analysis.
At the end of this course, students should be able to:

• Appreciate the importance of planning for successful business
management.
• Write a business plan and a business proposal.
• Apply the concept of time value of money for analysis of
agribusiness projects.
• Apply the techniques of capital budgeting in business
management decisions.

Course Contents:
The course will cover the different areas related to agribusiness planning and analysis as
listed below:
1. Definition and scope of Agribusiness planning
2. Development of effective corporate mission, vision, values, strategies and
objectives
3. The strategic planning process
4. Preparing a project/business proposal
5. Preparing a business plan
6. Logical framework approach to project analysis:
- Situation analysis: stakeholders, problems, objectives
- Strategy analysis or analysis of alternatives
- Development of logical framework matrix
7. Time value of money
8. Capital budgeting:
- Investment criteria – NPV, Payback, AAR, IRR, PI
- Making capital investment decisions
- Project analysis and evaluation
Approach to teaching:
• The course will make use of lectures with
interactive elements and discussions and group work
within and outside class sessions.
• Students are encouraged to actively engage in group
discussions and also attend class, take lecture notes,
and contribute to work group and discussions.

Assessment:
• The evaluation for this course shall be made as follows:
Assessment Max. Mark Date (2018) -
Tentative
Mid-Semester 10%
Examination
Group Assignment + 10%
Presentation I
Group Assignment + 10%
Presentation 2
End of Semester 70%
Examination
Course Material:
In addition to lecture notes, it is recommended that you read the list of books below and other text
books relevant to the topics of this course.
• Damona, D. (2008). “Budgets: Their Use in Farm Management”. Oklahoma Cooperative Extension
Fact Sheets. No. 139, pp. 1-4
• Damona, D. (2008). “Using Enterprise Budgets in Farm Financial Planning”. Oklahoma Cooperative
Extension Fact Sheets. No. 243, pp.1-4
• Derammelaere, S. and DeThomas, A. (2008). “Writing a Convincing Business Plan”. Third
Edition. New York: Baron’s Educational Series Inc
• Dorf, C. D. and Byers, T. H. (2008). “Technology Ventures: From Idea to Enterprise”. Second
Edition. New York: McGraw-Hill Companies Inc.
• Edwards, W. (1995). “Developing a Cash Flow Budget”. Ag Decision Maker, C13-15
• Forsyth, P. (2002). “Business Planning”. London: Captstone Publishing.
• Gesellschaft für Technische Zusammenarbeit (GTZ) (1991). “Methods and Instruments for
Project Planning and Implementation”. Eschborn: Germany.
• Lesley et al (1991). “Using the Partial Budget to Analyze Farm Change”. Maryland Cooperative
Extension Fact Sheet. No. 547, pp 1-9
• Ross, S. A., Westerfield, R. W. and Jordan, B. D. (1998). “Fundamentals of Corporate Finance”.
Fourth Edition, McGraw-Hill Companies, Inc., USA.
• Gittinger, J. P. (1982). “Economics Analysis of Agricultural Projects”. Second Edition. EDI, World
Bank, Johns Hopkins University Press, Baltimore and London.
Tentative Course Schedule:
Week Date (2018) Topic
Aug. 24 Registration of students
1 Sept 10/11 Definition and scope of Agribusiness Planning
2 Sept. 17/18 Corporate mission, vision, values, strategies and objectives
3 Sept. 24/25 Strategic planning process
4 Oct 1/2 Preparing a Project/Business Proposal
5 Oct 8/9 Preparing a Business Plan
6 Oct. 15/16 Logical framework approach to project analysis
7 Oct. 22/23 Logical framework approach to project analysis
8 Mid-Semester Exam
9 Nov 5/6 Time value of money
10 Nov. 12/13 Time value of money/Capital budgeting
11 Nov.19/20 Capital budgeting
12 Nov. 26/27 Capital budgeting
13 Dec 3/4 Revision
14-16 ABM 251: AgribusinessEnd of &Semester
Planning Analysis Examination 8
Lecture One:
Planning - Definition, Scope & Process

What difference and relationship?
• Project: generally, is an (investment) activity for which ‘resources -
COSTS’ - are spent in expectation of returns and which logically
seems to lend itself to planning, financing, and implementation as a
unit (Gittinger, 1982).
• Programme: An ongoing development effort; distinguished from a
project as including various ‘projects’ at various times as its constituent
units.
• Planning involves the analysis of conditions, setting goals, and
developing methods of reaching those goals.
Programming, in most cases, relates to the development of an actual
programme of projects and policies/plans to reach a goal.
The Project/Business Cycle:

• Conceptualization/Identification Preparation and analysis
Appraisal Implementation Evaluation
Project and Programme
Projects Programmes
• Are assembled from tasks. • Are assembled from projects.
• Rollup reporting is involves • Rollup reporting is involves
aggregating task performance. aggregating project performance.
• Are focused on “outputs” and • Are focused on “outcomes,”
“deliverables.” It is the result of a “benefits,” and achievements.
process. • Outcomes are things that can be
• If you can touch it or see it, it is graphed and analyzed for trends.
probably an output.
• Outcomes – often intangible;
difficult to quantify; benefits
• Outputs – tangible; relatively easy often based on changes to
to describe, define and measure; organizational culture and
tending towards objective. behaviors; introducing new
capabilities into the organization;
tending towards subjective.
Planning as ONE of the activities/functions of
management - a process.
What are the others?
(organizing, direction/leading, controlling/evaluating)
Planning means preparing for action.
What is your plan for this semester?
If you fail to plan, then you plan to fail

Planning - definition
• Planning as an act of making decisions about the ends (organizational
aims/objectives), means (plans), conduct and results (Cole, 2004)
• Generally, planning is deciding in advance what needs to be
done, why, how and when, and by whom.
• Planning involves logically thinking through the goals and making a
decision as to what needs to be accomplished in order to reach the
organizational objectives.
• Planning involves looking at the future by examining the past and
the present.
• The future of every business depends on the quality of planning
What really distinguishes a successful and an unsuccessful

manager is the extent of planning ……….
The planning process
Fundamentally, the process of planning generally involves the following:
1. determination of organizational goals and objectives
2. assessment of the industry - what influence?
3. conducting an inventory analysis – what resources are available?
4. determination of alternatives available to the manager
5. determination of inputs and possible production for each alternative
6. determination of the input costs and product prices
7. estimation of expected costs and returns from selected alternatives
8. estimation of the possible variation in costs and returns that might result
from differences between the estimated and actual - costs, yields and prices
9. analysis of the possible results of the various alternatives
10. development of an operating plan based on the probable results and
goals/objectives of the business and its owners and/or manager
The above process may or may not be chronological and may proceed in an
iterative manner where……. there might be the need to backtrack to alter
previous step(s) before satisfactory results in latter processes can be achieved.
Attributes of a good plan
• Planning must contribute to the farm objectives
• Planning must be done at all levels
• Planning must be based on consistent assumption
• Planning requires proper timing
• Planning requires communication
• Planning must be done within a policy framework
• Planning must involve alternatives
• Planning must recognize limiting factors - e.g. financial
component (i.e. budget) as resources are scarce
• Planning should allow for flexibility
• Planning involves strategy
• Planning involves forecasting
• Planning requires commitment
Benefits of Planning
1. Planning enhances decision making by providing
guidelines and goals for future decisions.
2. Planning helps minimize risks and uncertainties.
3. Planning enhances chances of success and reduces the
probability of failure as well as the impact of the failure.
4. Planning helps to minimise costs.
5. Planning is like a road map: it guides you from your
current state to your desired state (target).

Lecture Two
Development of corporate
Mission, Vision, Values, Objectives
& Strategies

Corporate MISSION
• A mission statement is a statement of the purpose of a
company, organization or person - i.e. its reason for
existing or what it stands for.
• A corporate mission statement defines what the

corporation does, who it serves, and how it serves (creates
value for) its clients.
• It forms the building block for an overall strategy and

development of more specific functional strategies.
• Creating a mission statement is one of the first actions an

organization should take.
• Note: the use of ‘IS ....’

Corporate MISSION
A good mission statement is precise in identifying the
following intents of a company:
• Philosophy: what ideology will be followed?
• Customers: who will be served?
• Products/services: what will be produced and/or sold?
• Location: where the products/services will be produced?
NOTE: A mission statement should be more than words on a

piece of paper - it should be a ‘living/breathing’
document that provides information and inspiration for
members of the organization.
WHAT IS YOUR ON CAMPUS?
Corporate VISION
• Nothing was ever created without a vision.
• Vision statement is an aspirational description of what an
organization would like to achieve or accomplish in the future.
• It is an informed and forward-looking statement of purpose that
defines the long-term destiny of the firm.
• Creating a vision statement is articulating your dreams and hopes for
your business.
What makes a good vision statement?
– Initial targets/current situation
– Expectations/achievements - measurable
– Specific time frame
NOTE: The more precise your vision..... the easier it will be to communicate it
and..... gain their commitment to it, and... the more likely its attainment.
Corporate VISION
In order to truly guide and motivate, a vision must:
• Be aligned with the core values of both workers and the business.
• Be effectively communicated to and accepted by ‘all’.
How relevant is aVISION statement?

• Serves as a picture of destiny as the firm moves through
challenges and changes.
• It gives shape and direction to the organization’s future.
• It helps workers to see what they are working towards.
Note: the use of ‘IS TO BE ....’

Corporate VALUES
• Values are qualities that are considered worthwhile; they
represent the organisation’s highest priorities and deeply held
driving forces.
• Value statements are declarations about how the organization
wants to value its customers, suppliers and be valued within
their own internal community.
• Value statements explicitly define how people will behave with
each other in the organization.
• Effective organizations identify and develop a clear, concise and
shared meaning of beliefs, priorities, and direction so that
everyone understands and can contribute.
• Values usually emanate from the entrepreneur or leaders of the
firm and once established all should share in it.
Corporate VALUES
A Value Statement typically has three components:
– The name of the value
– A clarifying statement or definition
– A few key behavioural attributes
Example: Responsibility – Being accountable for our actions.
• We fulfill our roles and responsibilities to the best of our abilities.
• We accept responsibility for our actions.
• We keep others informed.
• We make and support business decisions through experience and good
judgment.
NOTE: In our own lives, values form the basis for what we do and
accomplish; our choices are made based on the most cherished
values.
WHAT ARE YOURVALUES ON CAMPUS AND LIFE IN GENERAL?
GOALS & OBJECTIVES
• Mission and vision, though often brief statements about a
company, are too broad and abstract.
• They often seem ambiguous and perhaps even impossible to
achieve; hence the need for targets that should be ‘SMART’ -
specific, measurable, attainable, realistic and time-related.
• A goal is the overall target the firm aspires to achieve; it is an
observable and measurable end result having one or more
objectives to be achieved within a fixed timeframe.
• Objectives are the SMART targets the firm hopes to achieve.
NOTE: In strategic planning and project management, the general outcome
or final aim a business seeks to accomplish over a specific time period is
the goal, and the measurable results it must take in order to achieve
success, called objectives.
Corporate STRATEGIES
• The mission, vision, goals and objectives are just ends...
...and strategies are means to those ends.
• Aiming at being the market leader is not enough. The

question is HOW – by what strategy or plan?
• A strategy is a careful plan or method for achieving a

particular goal, usually over a period of time.
So, what is your strategy for excelling this semester and at

the end of your 4-year stay on campus, and overall life
after school?
Where is the link / relationship???
Source: National Treasury, Republic oof south Africa, 2010

Lecture Three
Strategic Planning Process
Strategic planning-pdf ???

Strategic planning
• It is important for the firm or entrepreneur to continue to plan,
both for the short-term and the long-term.
• Strategic planning is a review and planning process that is
undertaken to make thoughtful decisions about an
organization's future in order to ensure its success.
• It is usually a 3 to 5-year or more plan that includes all functions of an
organization.
• It is a disciplined process for making key decisions and agreeing
on actions that will shape and guide what an organisation is,
what it does, and why.
• It involves a careful consideration of an organization’s
capabilities and environment, ….. and leads to priority-based
resource allocation and other decisions.
Strategic planning & operational planning
Strategic Planning Operational Planning
• Long-term (usually 3-10 years) • Short-term (1 year or less)

• Focuses on future achievements • Achievements or targets
and conditions. annual
• Weighs a series of alternatives • Planned activities represent
before making fundamental choices already made;
choices alternatives are not
• Usually integrates several considered.
functions, levels, components • Tend to focus on one unit or
simultaneously related set of activities.
• Integrates strategies for resource • No formal action or
mobilization with activities ratification required.
(sustainability plans). • Resources for implementation
• Usually requires ratification from usually already identified.
governing structures.
Strategic planning enables you to answer
the following questions:
• Who are we?
• What capacity do we have/what can we do?
• What problems are we addressing?
• What difference do we want to make?
• Which critical issues must we respond to?
• Where should we allocate our resources?/what should our

priorities be?

Importance of strategic planning
1. A strategic (big-picture) perspective can help predict and plan
for the future.
2. A strategic plan helps an organization to create and maintain a

long-term view of what it wants to become.
3. It provides a framework for programmes that help the

organization better serve stakeholder needs.
4. It also helps identify what changes may be necessary for the

organization to compete effectively in the future.
5. Provides a framework against which to monitor progress, learn

from experience and make the changes necessary to improve
effectiveness and impact.
Strategic planning - When & How Often?
When do you need a strategic plan?
• When the strategic framework within which your organisation or
project functions needs to be developed, clarified, revised or
consolidated.
How often?
• It is advisable to plan for at least three years, while accepting that it
will be much easier for more established and better funded
organisations to adopt a forward thinking approach.
• The plan can be amended and modified to reflect developments that
have taken place over the year.
• It is usual for a strategic plan to be revisited annually as part of
the programme review process.
• Like other planning, it is an iterative process; changes are made over time,
if necessary, with the purpose of establishing an important long-term focus.
Outline of a strategic plan
1. Business mission
2. Situation analysis
3. Goal formulation
4. Strategy formulation
5. Formulation of programmes to meet goals
6. Implementation
7. Feedback and Control (M&E)

1. Business mission:
• restatement of the business mission and its evaluation to
ensure that it reflects the long-term vision of the company.
2. Situation analysis:
• What is the present business situation?
• What is the state of the industry and the economy?
• What products and services are most profitable?
• Why do people buy (or not buy) our products and services?
• Who are our major competitors?
• What are our strengths, weaknesses, opportunities and
threats (SWOT) to the company in the long term?
3. Goal formulation:
• focuses on long-term goals and objectives for addressing such
issues like profitability, people, company image, customer
relations, growth, new products and services, new markets,
new financing, or timing for the public offering.
4. Strategy formulation:
• how and when the goals and objectives will be achieved.
• will the strategy involve new segments?
• will it involve new markets, local and international?
• will the focus be on cost reduction to be price competitive?
• will the focus be on quality and sales to maintain higher
margins?
5. Formulation of programmes to meet goals:
• strategies are reflected in specific projects.
• may require projects such as market research, business
analysis, and testing before launch in the marketing place.
6. Implementation:
• once programmes and projects are identified, the next stage
is implementation, which addresses such issues as:
- Who will be responsible for each programme or project?
- What will be the expectation at the end of the 1st year, 2nd year,
3rd year, etc.?
- How much will it cost (budgeting)?

7. Feedback and Control:
• the final stage of the strategic planning process where the
plan is evaluated at the end of each year, and decisions made
to either continue or discontinue projects, or develop new
goals, objectives, strategies, and programmes to reflect new
opportunities or threats in the market place.
• at this stage, the company identifies the key variables that will
be evaluated at the end of each year, and what would be
expected outcome of each programme.
• a comparison is made of the actual results with the
expected results to ascertain what should be done in the
future.

Drawbacks of the strategic planning
process
❖May not be responsive enough for rapidly changing

competitive environments
- Develop a flexible strategic plan
❖Does not take into account unexpected events

- Scenario planning to take care of multiple contingencies

Lecture Four
Project/Business Proposal

BUSINESS PROPOSAL
Outline of presentation
• What is a business proposal?
• What are the types of proposal?
• What is the difference (if any) between a business plan and a

business proposal?
• How to write a business proposal

Business Plan & Business Proposal
• A business plan and a business proposal are different
documents - the two documents have different uses.
Business plan Business proposal

A written presentation of fact. A quote and call to action.
A factual broad description of a A focused ‘sales’ document
company and its prospects. intended to describe the value of a
project to the client and solicit
the client's response.
Describes how a business is to be A document that you submit to
set up - covers business structure, another enterprise proposing a
production and marketing strategies, business arrangement.
and a complete budget and financial
projections over a project’s ‘life’.
Business Plan & Business Proposal – contd.
Time Long-term plan of a business Not meant for longer term
– just intention
Audience/ Intended for the management as Intended for the other
Use well as the lenders and many business – e.g. for a joint
others. venture.
Need Guide for starting up a business - Really not for that purpose
usually defines the direction the - are short term and only
business wants to follow. needed to communicate a
business’ intention.
• Opportunity
identification
Time Long-term plan of a business Not meant for longer term
– just intention
Audience/ Intended for the management as Intended for the other
Use well as the lenders and many business – e.g. for a joint
others. venture.
Need Guide for starting up a business - Really not for that purpose
usually defines the direction the - are short term and only
business wants to follow. needed to communicate a
business’ intention.

Business proposal
1. A proposal is simply a clear written document that describes
what you are offering and how your product can help solve
the customer’s problem.
2. A tool designed to persuade a potential customer/client to
purchase a product, or to receive funding for a new project.
• You therefore need to understand the customer’s situation and

his/her objectives.
• Failure to focus on the specific needs of the customer

makes the document ceases to be a proposal

What do I have to consider?
• “You can get everything you want in life, if you will
just help enough other people get what they want.”
• An effective proposal describes not what

you want to sell, but instead, what the
customer needs or should buy and why.

Types of proposal
Solicited/Invited
&
Unsolicited/Uninvited proposal

Difference between Solicited and
Unsolicited Proposals?
• Solicited means invited whereas unsolicited means

uninvited.
• A solicited proposal is when the customer requests

for a proposal, an unsolicited proposal is when you
send a proposal to the customer for consideration.

Solicited or Invited Proposals
• Solicited proposals are usually sent to customers who issue
a “Request for Proposal” or RFP. E.g. Posting of public
tenders inviting contractors to bid.
• A solicited proposal provides a description of what the

customer wants.
• Usually, a format/structure/instructions and evaluation

criteria for selection (TOR: Terms of Reference) are
provided.

Unsolicited/uninvited proposal
• An unsolicited/uninvited proposal is sent to a customer
who has not requested for it.
• Unsolicited proposals must be convincing and

persuasive since the customer has not anticipated,
planned, or budgeted for it.
• It is possible that the potential clients will not even look

at your proposal (in the short-term), since they didn't ask
for it.
Writing a proposal - what should you include?
• No universal standard for layout of proposals.
• If it is truly meant to persuade someone, then one must

‘play with the cards’ of the one we want to persuade.
• To ‘WIN’, you must know your customer.

Outline of Project Proposal
• For most invited proposals the client will add the expected
or desired form of the proposal.
• If this is the case, you need to follow the outline and

requirements given.
Two main parts a proposal:

• The technical component (technical proposal as
usually called)
• The financial component - Also be referred to as
the budget.
Project proposal outline cont’d
1. Packaging
– the cover letter,
– the title/cover page
– table of contents

2. An Executive Summary
• The aim should be to spark the reader’s interest and to
encourage further examination of the proposal.
– It should introduce your company
– The gap or problem - needing solution
– what you will do or provide - i.e. the solution
– More importantly, how the customer will benefit from

what you propose.

3. Identification and description of the problem
• Definition of problem
- Clear information on how serious the problem
- Causes of the problem
• Existing efforts to solve the problem by others
• Knowledge and experience about efforts elsewhere
• Summary of why a new project is necessary

4. Description of the proposed product/project
• Statement of project goals and specific objectives in

terms of expected results.
• A statement of work or technical approach describing

what you will do or provide to the customer.
• Brief description of the product or service or project
• Justification of why the proposed solution is appropriate.
• Identification and rejection of other alternatives.
• Expected project benefits (direct and indirect).

5. Plan of action
• Description of activities, time, resource
requirements
• An implementation schedule
• Description of deliverables or direct output(s) from the

project.
• It is important to include monitoring and evaluation

system
6. Management and Staffing plan
• A management plan describing how you will organize
and supervise any work to be performed.
• Corporate qualifications that describe your

capability to do or provide what you are proposing.
• Relevant prior experiences should be

highlighted.
• Organisational structure for project management.

7. The financial component or the budget
• For solicited proposal, the client will provide the amount
they are ready to work with and the format for presentation.
In that case, you need to work with client’s budget.
• For unsolicited proposal, do your homework to know what
the client is willing to offer.
• Budget summary - Description and costing of inputs

required.
For most projects, you will need to show your financial

strength since payments may be made after you
have pre-financed the project. 59
ABM 251: Agribusiness Planning & Analysis
Lecture Five
Business Plan

Business plan – What is it?
• The business plan is a written document that describes all the
relevant internal and external elements and strategies for
starting a new venture.
• It describes WHAT is to be achieved in business and HOW to

achieve it.
• It is often an integration of functional plans such as

production/manufacturing, marketing, financial, and human
resources.
• It is sometimes referred to as the game plan or road map, as

it answers the questions:
- What do I want to do,Where am I now? Where am I

going? How will I get there, Should I make a move?
61
Business plan – Is it necessary?
• The business plan, although often criticized for being ‘dreams
of glory’, is probably the single most important document to
the entrepreneur at the start-up stage.
• For any given organization, it is possible to find various plans

– production, marketing, human resource, and financial.
• Potential investors are not likely to consider investing in a

new venture until the business plan has been completed.
• The business plan helps maintain a perspective for the

entrepreneur of what needs to be accomplished.
• It provides guidance to management in the rapidly changing

market environment.
62
Who should prepare the Business plan?
• The business plan should be prepared by the owner of
the business or entrepreneur
• However, s/he may consult others in its preparation.
• Institutions (public and private), marketing
consultants, agriculturists, lawyers, accountants,
engineers, and friends with business experience, are
useful in the preparation of the plan.
63
Who will use your business plan?
Who needs your business plan?
1. Internal users: the entrepreneur and her team/partners,
key employees.
2. External users: individuals or institutions outside your

firm who will require information about your business
before they can make informed decisions on whether to:
– invest in your business,
– join you,
– enter into contract with you, or
– have any form of (business) relationship with your firm.
64
Importance of the business plan
• It helps to determine the viability of the proposed
business in a designated market.
• It provides guidance to the entrepreneur in organizing
resources for implementation of a business.
• It helps to evaluate the funding required and the
financial targets to meet within the specified period.
• It serves as an important tool in helping to obtain
funds (non-equity) for a business.
65
Things to remember when writing and using a
business plan
➢ Although ‘not difficult’, writing a business plan requires commitment.
➢ All issues might not be addressed immediately at a particular point in

time...
➢ ...in which case further research and consultations should be made.
➢ Garbage-In-Garbage-Out (GIGO) principle applies to the process.
➢ A business plan is not a static document and…
➢ ...it is therefore normal for the initial direction of the plan to change.
➢ Changes within the internal and external environments may call for
alterations in the initial plan.
66
Types of business plan
• The intended use/user determines the type and length.
1. Standard plan
➢ Usually used when outside financing is needed – investors.
➢ Should be devoid of ‘unnecessary’ or irrelevant elaborations
and details. Usually about 30 pages (±5 pages).
2. Operational plan
➢ Primarily prepared for the entrepreneur and the
management team…
➢ …to serve as a guide or road map.
67
3. (a) dehydrated business plan
➢Basically, serves to complement the first two types and

usually not enough as ‘stand-alone’ plan.
➢The purpose of the dehydrated plan is to provide

an initial conception of the business to test initial
reaction to the entrepreneur.
➢Short and concise, usually not exceeding 10

pages.
68
3 (b) expanded executive summary
➢ Also serves to complement the first two types, usually, not
enough as ‘stand-alone’ plan.
➢ The expanded executive summary is used to attract

the attention of the ‘busy’ investor.
➢ The expanded executive summary is usually prepared after

the ‘actual (or long) plan’ has been prepared.
➢ Usually, not exceeding 10 pages.
69
Outline of a business plan
• Introductory section – packaging and cover letter
• Executive summary
• Industry analysis
• Description of venture
• Production plan
• Marketing plan
• Organizational plan
• Assessment of risks and uncertainties
• Financial plan
• Appendix
70
Packaging and Cover letter
1. PACKAGING
➢ Three major items go into the packaging of the business plan:
cover letter, the title/cover page and table of content.
➢ Good packaging sends an important message about the care and
diligence used in preparing the plan as well as the future
management of the business
2. The cover letter

➢ Introduces you the entrepreneur and your proposed business to
your intended audience.
➢ It should identify you, the reason the business plan is being
presented, and the documents included in the presentation
package.
71
Title/cover page
Should consider:
• Name and address of business, Name(s) and address(es) of
principals, Statement of financing needed, Statement of
confidentiality of report, Consultant(s) and Date.
• The title page sets out the basic concept that the entrepreneur is
attempting to develop.
• Investors consider it important because they can determine the
amount of investment needed without having to read through
the entire plan.
• Should there be any sensitive information in the plan, a
‘confidentiality statement’ (a.k.a. statement of non-disclosure)
should be included on the title page.
72
Executive summary
• This section is prepared after the total plan is written.
• Should stimulate the interest of the potential investor.
• Must highlight in a concise and convincing manner the

key points in the business plan - nature of the venture,
financing needed, market potential and support as to why
it will succeed.
• The investor uses the summary to determine if the

business plan is worth reading in total.
73
Industry analysis
• Review industry trends and competitive strategies.
- the historical achievements and future trends
- insight on new product development in the industry
- identify major competitors - their strengths and
weaknesses, particularly as to how they might affect the
new venture’s potential success in the market
• What market segments and the target market?
• Any forecasts by the industry or by the government?
74
Description of Business
Indicate:
• Mission and Vision Statements, Goal and Objectives, Product(s),
Service(s), Location and Size of business, Structure(s), Office
equipment and personnel, Background of entrepreneur(s).
Description of the venture should be detailed:
• It enables investors to know the size and scope of the business.
• Location of any business may be vital to its success.
• Also, explain the type of building (leased or owned), office
equipment and personal needed, additional skills and
management experience required of the entrepreneur, reasons
for going into business, conditions to achieve success, and
development works that have been completed to date.
75
Production/operational plan
• Indicate: Production process, Physical plant, machinery and
equipment, Types and sources of raw materials, Production cost,
Quality control, Safety, health and environmental concerns.
• This section provides details of how products will be produced,

and/or describes how purchasing of merchandize, inventory
control system and storage needs should be carried out.
• The entrepreneur should describe the physical plant layout; the
machinery and equipment needed to perform the production
operations; raw materials and suppliers’ names, addresses, and
terms, costs of production; and any future capital equipment
needs.
76
Marketing plan
• Indicate: Potential customers, Pricing, Distribution, Promotion,
Product forecasts, Controls.
• This section describes the market conditions and strategies related to

how products and services will be priced, promoted and distributed.
• Specific forecasts for products are indicated in order to project
profitability of the venture.
• The objective of the marketing plan is to optimize the income of the
company by defining, forecasting, satisfying and creating demands for
existing and new products.
• It should be comprehensive and detailed as possible so that investors
can be clear as to what the goals of the venture are, and what
strategies are to be implemented to effectively achieve these goals.
77
Organizational plan
• Indicate: Form of ownership, Identification of partners or
principal shareholders, Organization chart, Management-
team background and roles and responsibilities of members
of the organization.
• This section describes the form of ownership

(proprietorship, partnership, or corporation), and lines of
authority and responsibility of members of the new venture.
• It identifies members of the management team and their
background, roles and responsibilities of each member, as
well as their remuneration and forms of payment.
78
Assessment of risks and uncertainties
• Evaluate weakness of the business, New technologies,
Contingency plans.
• This section identifies potential hazards and alternative
strategies to meet goals and objectives.
• Risks for a new venture could result from a competitor’s
reaction; a weakness in the marketing, production and
management team; and new advances in technology that might
render the new product obsolete.
• The provision of alternative strategies and contingency plans
illustrate to the potential investor that the entrepreneur is
sensitive to important risks and is prepared should any arise.
79
Financial plan
• Indicate: Key Assumptions (exchange rate, insurance, tax rate,
depreciation, production levels, pricing), Pro-forma income
statement, Cash flow projections, Pro-forma balance sheet,
Financial analysis – breakeven analysis, financial ratios.
• This section determines the potential investment commitment

needed for the new venture and indicates whether the business plan
is economically feasible.
• Generally, three financial areas and analysis considered:
- summary of forecasted sales and appropriate expenses;
- sources and uses of funds; and
- projected balance sheet.
• Any assumptions considered should also be listed for the benefit of
the potential investor.
80
Appendix
• Indicate: Backup material – letters, market

research data, secondary data, leases and contracts
agreements, price list from suppliers.
• This section contains any backup material that is

not necessary in the text of the document.
81
Why some business plans fail
A business plan may fail when it is poorly prepared
.... and a poorly prepared business plan can be
liable to one or more of the following factors:
• Unreasonable goals
• Goals are not measurable
• Lack of commitment - business or to the family.
• Lack of experience
• No sense of potential threats or weaknesses to the
business.
82
Lecture Six:
Logical framework
approach for project design,
monitoring and evaluation

Logical Framework Approach (LFA)
• There is no one specific methodology for planning/developing
and implementing agribusiness projects and programmes.
• LFA is a planning methodology that can be used to design and

implement many projects.
• LFA is a management tool mainly used for designing,

monitoring and evaluation of developmental projects.
• The purpose of LFA is to undertake a participatory and

objective-oriented planning that spans the life of a project.
84
Functions of LFA
LFA fulfils several functions:
1. It develops a structured set of project ideas by clarifying
goals, purposes and outputs.
2. It provides a clear, brief and logical description of the

proposed project.
3. It helps to identify possible risks to project

implementation.
4. It provides a useful basis for project appraisal.

85
Importance of LFA
LFA, as a management tool can help planners to:
– analyse the existing situation for programme/project
preparation;
– establish a logical hierarchy of means by which objectives
will be reached;
– identify the potential risks to achieving the objectives, and to
sustainable outcomes;
– establish how outputs and outcomes may best be monitored
and evaluated;
– present a summary of the project in a standard format; and
– monitor and review projects during implementation.
(Ahmad, 2010)
Steps in a logical framework analysis
There are four main steps in conducting an LFA:
1. Situation analysis:
a. Analysis of stakeholders
b. Analysis of problems
c. Analysis of objectives
2. Strategy analysis or analysis of alternatives.
3. Project planning matrix
4. Implementation* (Not really part of the process but like all
plans, the product of LFA should be converted into reality).
87
1. Situation analysis
• The LFA begins by analyzing the existing situation and…
• …developing objectives for addressing real needs.
• Its core task is to find out the actual state of affairs with
respect to an issue to be analyzed.
The situation analysis phase consists of three stages:

a. Analysis of stakeholders
b. Analysis of problems
c. Analysis of objectives
88
1.a Stakeholder analysis
• A stakeholder is any individual, group, community or
organization…
• …with a potential interest in the outcome of an activity,
• …either as a result of being affected by it or by being able
to influence the project, in a positive or negative way
A stakeholder analysis should help to identify:

1. different viewpoints
2. possible conflicts
3. capacities to build on
4. ways to reduce or remove negative impacts
5. incentives and disincentives for different
stakeholders.
89
Why do we need stakeholder analysis?
1. To provide a foundation and strategy for participation.
2. Mobilization of key stakeholders, building up common

awareness, creating ownership.
3. To better target interventions and approaches.
4. As a management tool in policy making.
5. As a tool to predict and/or manage conflicts

90
Steps in conducting stakeholder analysis
STEP ACTION
1 Identify the general development problem that needs
to be solved.
2 Identify all the stakeholders who have an interest in
the problem/desired outcome (both positive and
negative).
3 Assess importance of each of these stakeholders to
the problem and their capacities to influence it.
4 Identify possible co-operation and conflict between
the different stakeholders.
5 Use an appropriate tool to analyze and represent the
information. 91
Stakeholder analysis cont’d
There are a number of possible tools that can be used to
represent information gathered in a stakeholder analysis:
Stakeholder landscape
a. STAKEHOLDER ANALYSIS MATRIX
b. VENN DIAGRAM
Situation of individual stakeholders

c. SWOT ANALYSIS
d. SPIDER DIAGRAM
92
a. Stakeholder analysis matrix
• A table to show different characteristics of the various stakeholders.
• The stakeholders are listed in the first column of the table.
• Each subsequent column summarizes their likely position in relation to
particular issue.
• A template for stakeholder analysis matrix may be as below:
Stakeholders Role/ Capacity Importance of Motivation/
interest of affect the stakeholder Willingness
stakeholder problem (relative to project to solve the
(Influence) objectives) problem
Producers
Middlemen
Traders
Government
Consumers
• The 3rd and 4th columns (from the stakeholder matrix) can be used to
construct an importance-influence matrix which graphically displays the
extent of importance and influence of each of the stakeholders
93
Importance Stakeholder matrix
◼ A. ◼ B.
⚫ high importance ⚫ high importance
⚫ low influence ⚫ high influence
◼
◼
⚫ low importance
Influence
⚫ low importance
⚫ high influence
⚫ low influence

b. Venn Diagram
VENN DIAGRAM
• This uses a series of circles to show the
relationships between different Activity variables,
such as stakeholder groups.
• The size of the circles represents the relative power

or influence of the group and their spatial
separation shows the working connections between
them.
96
b. Venn Diagram

c. SWOT analysis
SWOT ANALYSIS
• To analyze the internal strengths and weaknesses
of an organization and the external opportunities
and threats that it faces.
98
SWOT Analysis Format: e.g. Scale +5 to -5
Strengths Weaknesses
(positive - capitalise) (negative-eliminate)
• Experience in citrus processing (5 • Do not know much about
points) business
• Knowledge of customers (4 points) management (-5 points)
• Good negotiation skills (1 point)
• Have start-up capital (2 points)
Opportunities (take advantage) Threats (avoid)

• Location: Kumasi – highly One of the juice processing
populated and high growth rate – factories in the nearby
high demand (4 points) location has a good
• Few processors (3 points) reputation (-4 points)
Total of score +19 points Total of score - 9 points
Final result +10 points
d. SPIDER DIAGRAM
• Spider diagrams can be used to help analyze and provide a
visual summary of institutional capacity.
Technical Skills
3 0= undesirable
Financial situation: dramatic
Good governance
Management 2 improvement needed
1 1= poor situation:
Personnel
Management, learning & significant
training & Staff
0 Evaluation improvement needed
motivation
2= satisfactory:
Links with other some scope of
Client Focus relevant improvement needed
organizations
Policy & Planning 3= Highly effective
Systems
100
d. SPIDER DIAGRAM - cont’d
The spider diagram above indicates that:
• the agency has relatively strong technical management
skills/capacity, and that its policy and planning systems are also
fairly robust, but …..
• the agency has some critical shortcomings in terms of governance, its
relationship with its clients and learning and evaluation mechanisms.
• This suggests that the critical constraints to the capacity of this

agency are therefore related more to organizational culture and
management priorities than to either technical skills or basic
management competencies.
• A key requirement in undertaking this type of analysis is to include all
the relevant characteristics of the organization(s) being studied as a
‘segment’ of the spider diagram.
101
1.b: The analysis of problems
❖The problem analysis - to identify the main needs and…
❖…develop a 'problem tree' through an analysis of causes
and effects.
❖The key purpose of this analysis is to try and ensure that
‘root causes’ are identified and…
❖…subsequently addressed in the activity design, not just
the symptoms of the problem(s).
❖The guiding principle in the Analysis of Problems is:
problem focused analysis combined with a systems’
understanding.
102
The analysis of problems - cont’d
• Brainstorming techniques can be used to identify the main
problems.
Step Action
1 Agree on the problem or need that should be analyzed
2 Identify the ‘focal problem’, i.e. the problem or need that the
target group considers to be the most critical
3 Identify all of the other problems associated with the focal
problem
4 Develop a problem tree to show the hierarchy of all of the
problems in terms of their cause and effect relationship
103
The problem tree should be developed as a participatory
group activity. (6 to 8 people is often a good group size: if
more people need to be involved use more groups.)
Step Action
1 Brainstorm suggestions to identify the focal problem and write it on a card or
‘Post-it’
2 Brainstorm all of the related problems to the focal problem and write each
problem on a separate card (or a Post-it)
3 Establish a hierarchy of causes and effects – problems that are directly causing
the focal problem go below it, and problems that are effects of the focal
problem go above
4 For each problem ask the question ‘What causes this problem?’ Write the
causes on separate cards and place them below the problem they cause. If there
are two or more causes of a problem, and one is not the cause of the other then
place them on the same level.
5 Review the problem tree for completeness and accuracy and connect the
problems with cause-effect arrows/lines to show the
104
Key points to remember:
❖Involvement of the right people.
❖The process is as important as the product
❖Valid but simple representation of the current

(negative) situation .
❖concentrate on the most important causes.

105
Problem Tree
Effects High cost of High rate of Inability to repay Inability to continue
food malnutrition borrowed funds production
Food shortage Farmers incur losses
Focal Problem LOW YIELD
Inappropriate Poor planting Disease & pest

time of planting materials attack
Unreliable source of Infrequent

Poor record weeding
keeping material
Low investment Inadequate

Causes Lack of technical finance
know-how into R & D
106
Coffee break (5 minutes)

1.c: Objectives analysis
❖translates the problems identified into positive outcomes
❖Viewed as the positive mirror image of the problem tree
❖Restate the problems as objectives
❖The objectives tree can also be considered as an 'ends -

means' diagram.
❖The top levels of the tree are the ends that is desired and
the lower levels are the means to achieving the end.
108
Objective Tree
Ends Cost of food Reduced Continuous
Able to repay all production
affordable malnutrition borrowed funds
Availability of food Farmers make profit
HIGH YIELD
Optimum planting Absence of

Quality raw materials diseases & pests
time
Accurate & reliable Reliable source of Timely weeding

data inputs
Provision of
Means Technical training Investment into R & D financial support
109
2. Strategy analysis or analysis of alternatives
❖It involves systematically searching for and deciding on
solutions to identified problem.
❖All alternative strategies considered must contribute to

solving a problem.
OR
❖Must be suitable towards the attainment of identified
guiding objectives.
OR
❖They should be relevant.
110
Strategy analysis involves seven main steps:
Step Action
1 Identify the different approaches/means in the objectives tree
2 Eliminate any objective(s) that is/are clearly unachievable
3 Identify branches already being pursued by other development
activities in the area
4 Assess the implications of different strategies on different
stakeholders
5 Assess the likely feasibility of the alternative strategies
6 Check the choice against the key criteria (see below)
7 Carry out a detailed risk analysis of the chosen strategy
111
Key criteria to use in a Strategy Analysis
• Financial and economic criteria: cost benefit, financial
sustainability etc.
• Social criteria: suitability in terms of gender issues, socio-
cultural constraints,
• Environmental criteria: environmental impact,
environmental costs versus benefits, potential for
environmental improvement
• Technical criteria: appropriateness, use of local resources,
technical feasibility and sustainability
• Institutional criteria: existing institutional capability,
contribution of strategy to capacity building, leadership
• Also, PEST and PESTEL
112
3. Logical framework matrix (LFM / PPM)
• The LFM or PPM is developed from the
strategy analysis
• The PPM enables decision makers to:
- identify project goals and
purposes/objectives and plan for
project outputs and inputs.
- Objective basis and assumptions about
causal linkages.
3. Logical framework matrix (LFM / PPM)
Narrative Objectively Means of Assumptions
Summary or Verifiable Verification and/or risks
Activity Indicators (MoV)
Description (OVIs)
Goal
Project
Objectives/
Purpose
Results/
Outputs
Inputs/
Activities
Logical Framework Matrix (LFM)
NARRATIVE SUMMARY
1. Goal
❖ The overall target or developmental benefits that is expected to
be gained from the project or program.
2. Project Objectives or Purpose
❖The specific or immediate target or impact on the project area or
target group.
❖Should be SMART
3. Outputs / Results
❖ The goods and services, the direct deliverables which are
contributed from the side of a project or program.
4. Inputs/Activities
❖Measures / tasks carried out by the project / program in order to
achieve and obtain the outputs/results (actions).
116
Objectively Verifiable Indicators (OVI)
❖How will we measure the attainment of the narrative
summaries?
❖What indicators will be used to assess/evaluate the
narrative summaries.
❖Quantitative ways of measuring or qualitative ways of
judging timed achievement of goal.
❖The OVIs should be SMART & Sensitive.

117
Logical Framework Matrix (LFM) cont’d
Means of Verification (MoV)
• Establishment of source of information and means of collection
• An MoV should test whether or not an indicator can be
realistically measured...
• ...at the expense of a reasonable amount of time, money and
effort
• How the data will be collected
• Who should collect/provide the data
• How often the data will be collected
• The format in which the information should be made available
118
Assumptions and/or risks
• These are important events, conditions, or decisions which are
necessarily outside the control of the project ...
• but which are critical for the project objective to be attained
The aims of specifying assumptions are:

– to assess the potential risks to the project concept
– to support the monitoring of risks during the implementation
of the project
– to provide a firm basis for necessary adjustments within the
project whenever it should be required
119
4. Implementation
• The operational phase of a project commences when
implementing activities begin in order to achieve the
expected outputs/results.
• In many cases this may be one or two years after

establishment of the project concept - at the end of the
design phase (as laid down in the PPM of the project
appraisal).
• The project purpose and development goal, however, should

be altered only in exceptional cases when major changes
have occurred.
120
Implementation – cont’d
• Implementation should have a plan of operations, i.e. the
comprehensive plan for the implementation of project.
• It is established by the project team and documented as:
– work plans / work schedules
– project budget / resources plans
– personnel plans
– material and equipment plan / procurement plan / staff training
plans.
• The work plan and the project budget constitute the core of
the Plan of Operations.
121
Lecture Seven
Time value of money

TIME VALUE OF MONEY (TVM)
• The passage of time between the outflows and
inflows in an investment results in different current
values associated with cash flows that occur at
different points in time.
• Thus, it is not possible to assess an investment simply

by adding up the total cash inflows and outflows and
determine if they are positive or negative without first
considering when (TIME) the cash flows occur.
• TVM is based on the concept that ‘a cedi that you

have today is worth more than the promise or
expectation that you will receive a cedi in the future’.
Why is a Cedi today worth more than a cedi in
the future?
• Inflation - reduces the purchasing power of cedi
through time.
• Opportunity cost - lost earnings or alternative use
for money.
• All future values are in some sense only promises,
and contain some uncertainty about their
occurrence.
• Human preferences typically involve impatience -.
preference to consume goods and services now
rather than in the future.
So.....
• Is giving up GH¢500 in exchange for GH¢10,000 in 30
years a good deal?
• A single sum of money or a series of equal, evenly-

spaced payments or receipts promised in the future can
be converted to an equivalent value today ....... Future
Value (FV) to Present Value (PV).
• Conversely, you can determine the value to which a

single sum or a series of future payments will grow at
some future date ..... Present Value (PV) to Future Value
(FV).

Some fundamental terms
• Present Value (PV) - is an amount today that is
equivalent to a future (t) payment, or series of payments
discounted by an appropriate interest rate (r). This is
called discounting.
• Future Value (FV) - is the amount of money that an

investment with a fixed, compounded interest rate (r)
will grow to at some time in the future (t). This is called
compounding.
• The PV and the FV values can either be a single or

unequal multiple cash flows OR multiple equal cash flows
– annuity.
Future Value (FV) and Compounding
• A cedi in a typical savings account will earn interest
both on the initial principal and on any interest
accrued or accumulated prior to the current period.
• In other words, the depositor is earning “interest on

interest”, assuming the depositor has not withdrawn
the interest from the prior periods.
• How is the value of a savings account determined

after several periods have elapsed, assuming no
withdrawals?

Compounding
• The future value (FV) of a present sum determined by:
FV = PV (1+r)t
r, interest rate; t, number of periods; FV, future value at
the end of t periods; PV, present value/principal at time 0;
(1+r)t, future value interest factor, FVIF(r,t)
• Compounding – process of accumulating interest in an

investment to earn more interest.
• Interest on interest – interest earned on the
reinvestment of previous interest payments.
• Compound interest – interest earned on both the initial
principal and the interest reinvested from prior periods.
• Simple interest – interest earned only on the original
principal amount invested.
Example (1) of compounding
GH¢325 invested @ 14% pa for 2 years. What is the FV? How much
of this is simple interest? How much is compound interest?
What is the effect of compounding?
✓ FV = PV(1+ r)t = 325(1+ 0.14)2 = GH¢422.37
✓ Total interest (Compound Interest) at end ofYear 2
= 422.37 – 325 = GH¢97.37
✓ Simple interest = P * T * R 325 * 2 * 0.14 = GH¢91
NB: Interest/year = 325 * 0.14 = 45.50 (2 years = 45.50 * 2 = GH¢91
✓ Interest on interest (effect of compounding)
= 45.50 * 0.14 = GH¢6.37
✓ The difference of GH¢97.37 and GH¢91 = GH¢6.37, results from
compounding (i.e. interest on interest earned in 2 years)

Example (2) of compounding
GH¢1000 invested for four years, earning 6% interest with
annual compounding. What is the FV? How much of this is
simple interest? How much is compound interest?
FV = PV(1+ r)t = 1000(1+ 0.06)4 = GH¢1262.47

Total interest = 1262.47 - 1000 = GH¢262.47
Simple interest = P * T * R
1000 * 4 * 0.06 = GH¢240
NB: Interest each year = 1000 * 0.06 = 60
For the 4 years = 60 * 4 = 240
Compound interest:
= GH¢262.47 - GH¢240 = GH¢22.47
Using Annuity FV = C*(1+ r)t -1)/r
Compounding made easier
• The value for the term (1.06)4 in Example (2) can be
calculated by multiplying 1.06 by itself four times (1.26247).
• To shorten this laborious process, an interest rate table

(or compounding table) which calculates the FV is used.
• Given t (or n) to be 4 and r (or i) to be 6%, the value of

the term is calculated to be 1.262
• What the table indicates is how much to obtain by investing

GH¢1 for some number of periods (usually in years) at a
certain interest rate .
Present value (PV) and Discounting
• Discounting is the reverse of compounding
• Whiles compounding seeks to find how much cedi will

worth at some time in the future, compounded at some
interest rate for some time period ..............
• ......... discounting seeks to find out how much is the

future amount today, discounted at some interest rate for
some time period.

Discounting
• The present value (PV) of a future sum is determined by:
PV = FV * 1/(1+r)t = FV / (1+r)t
r, interest rate; t, number of periods; FV, future value at
end of t periods; PV, present value at time 0; 1/(1+r)t,
present value interest factor or discount factor, PVIF(r,t)
• Discount – means calculate PV of some FV.

• Discount rate – the interest rate used to calculate the PV
of future cash flows.
• Discounted cash flow (DCF) valuation – calculating the
PV of a future cash flow to determine its worth today.
• NB: PV is the reverse of FV. Instead of compounding the
money forward into the future, we discount it back to the
present.
Example (1) - discounting
A firm wants to buy automobile. Firm has
GH¢50,000, but vehicle cost GH¢68,500. If firm
can earn 9% on savings, how much to invest NOW
to buy the vehicle in 2 years?
PV = FV / (1+ r)t
= 68,500 / (1+ 0.09)2 = GH¢57,655.08
The firm still needs about GH¢7,655.08 or is about
GH¢7,655.08 short even if firm is willing to wait
Two years.

Example (2) - discounting
How much money needs to be put in a savings
account TODAY in order to have GH¢1,262.47 in
four years if the account earns 6% interest per
annum?
PV = FV / (1+ r)t
= 1,262.47 / (1+ 0.06)4 = GH¢1,000
Receiving GH¢1,262.47 in four years is the same as
having GH¢1000 today, if the discount rate (the
opportunity cost) is 6% per annum.

Relationship between PV and FV
• Discounting is the reverse of compounding.
• The PVIF(r,t) is just the reciprocal of FVIF(r,t)
• PVIF (r,t) = (1+r)t and FVIF (r,t) = 1 / (1+r)t
• PV = FV / (1+r)t or FV = PV (1+r)t
• Based on the relationship, we can compute the interest rate, r and
period, t.
Example: Find r?
• If FV = GH¢200, PV = GH¢100 in 8 years, what is r?
FV = PV (1+r)t 200 = 100 (1+r)8
= 200/100 = (1+r)8
= 21/8 = 1+r r = 0.905 = 9%
Example: Find t?
• If FV = GH¢50,000, PV = GH¢25,000 at 12%, Find t?
FV = PV (1+r)t 50,000 = 25,000 (1+0.12)t
= 50,000/25,000 = (1.12)t 2 = 1.12t
t = In2 / In1.12 = 6 years
Valuing multiple cash flows
Example of FV with Multiple Cash Flows:
• If Year 1 deposit GH100 @ 8% and Year 2, GH100, how much
(total) in Year 2?
Year 1 FV = PV(1+r)t = 100 (1.08)1 = GH108
Year 2 PV = PVyr1 + PV yr2 = 108 + 100 = 208
Year 2 FV = = PV(1+r)t = 208(1.08)1 = GH224.64
Example of PV with Multiple Cash Flows:
• Suppose you need GH1000 in Yr 1, and GH2000 in 2 years @
9%, how much do you have to deposit TODAY?
Year 1 PV = FV/(1+r)t = 1000/(1.09)1 = GH917.43
Year 2 PV = FV/(1+r)t = 2000/(1.09)2 = GH1,683.36
Total PV in Year 2 = 917.43 + 1683.36 = GH2,600.79
• An investment will pay GH200 in Yr 1, 400 (Yr2), 600 (Yr3) and
800 (Yr4) @ 12%. What is the most you should pay for this
investment, if you can earn 12% on a similar investment?
• Answer: GH1,432.93
Valuing Level Cash Flows:
Annuities & Perpetuities
• A common occurrence when evaluating future benefits
and costs in a project is to determine the present value
of a series of equal-sized cash flows made over a number
of periods (Annuity) or forever/infinite period
(Perpetuity)
• Examples of annuities are Mortgage and Car loans,

student loans etc.
• Example of perpetuities is Consols/Consolidated

Securities (in Canada and UK)
Annuities
• Annuity – a level stream of cash flows for a fixed
period of time.
• Could be PV for Annuity Cash Flows – PVIFA(r,t)
or FV for Annuity Cash Flows – FVIFA(r,t)
• Two types of annuities:

– Ordinary annuity - cash flow at the end of each
period. Example: repayment of loan.
– Annuity due - cash flow at the beginning of each
year. Examples: insurance and retirement investment.
PV for Annuity Cash Flows
• Annuity PV factor:
= (1 - PV factor)/r = (1-(1/(1+r)t)/r = (1-(1+r)-t)/r
• Annuity PV = C * (1 - (1+r)-t)/r
Example 1: GH500 return at end of each year for 3

years at 10%. How much to offer for investment?
• Annuity PV = C * (1 - (1+r)-t)/r
= 500 * (1 - (1+0.10)-3)/0.10
= GH1,243.43
Example 2: PV Annuity Cash Flows
• For example, what is the present value of receiving GH¢
100 every year for five years when discounted at 12%?
• One way of solving this problem is to multiply GH¢ 100 by
the PV factors given in the discount table at a discount rate
of 12% for years 1 through 5 as illustrated below:
Year 1: GHC 100 * 0.8929 = 89.29
Year 2: GHC 100 * 0.7972 = 79.72
Year 3: GHC 100 * 0.7118 = 71.18
Year 4: GHC 100 * 0. 6355 = 63.55
Year 5: GHC 100 * 0.5674 = 56.74
Total 3.6048 360.48
Alternatively, .........
• The answer could have been derived more quickly by
multiplying GH¢100 by the annuity factor (3.6048, the sum of
the present value factors over the number of periods desired).
• Thus, the annuity is represented mathematically as follows:
PV = XAt, r
• Where At, i= annuity factor received each period for t years
discounted at r% per period.
• Using the above example,

PV = XA5, 12%
= GH¢100 * 3.6048
= GH¢360.48
FV for Annuity Cash Flows
• Annuity FV factor:
= (FV factor - 1)/r = ((1+r)t - 1)/r
• Annuity FV = C * ((1+r)t - 1)/r
Example: GH2000 contribution every year @ 8% for 30

years. How much at end of period?
• Annuity FV = C * ((1+r)t - 1)/r

= 2000 * ((1+0.08)30- 1)/0.08
= GH226,566.42
Annuity Due Vs. Ordinary Annuity
• Annuity Due – is an annuity for which the cash flows occur at
the beginning of the period. E.g. Insurance, Lease/Rent.
• Ordinary Annuity – where cash flows occur at the end of
period. E.g. Loan repayment.
400 400 400 400 400 400

Due Ordinary
Example: GH400 pa for 4 years @ 10%. What is the PV?
• Annuity (Ordinary) PV = C * (1 - (1+r)-t)/r
= 400 * (1 - (1+0.10)-4)/0.10
= GH1,267.95
• Annuity (Due) PV = 1,267.95 + 400 (t=0)
=GH1,667.95
Perpetuities
• Is an annuity in which the cash flows continue forever (infinity) .......
the cash flows are perpetual.
PV for Perpetuity = C * 1/r = C/r
• Example: Preference/preferred stock where the buyer (risk averse)
is promised a fixed cash dividend every period forever. The dividend is
usually paid before any other dividend is paid to regular stockholders
(risk seekers).
• Mr. Ato wants to sell preferred stock at GH100/share. A similar issue

of stock is GH40/share of GH1 dividend every quarter. What
dividend must Mr. Joe offer?
• PV = C * 1/r = 40 = 1/r = r = 2.5%
• To be competitive, Mr. Joe must offer dividend:
• 100 = c * 1/0.025 = GH2.5
Intra-period compounding
• The formula FV = PV (1+r)t is useful whenever you want
to determine the future value of an investment, assuming a
specific interest rate and investment-holding period.
• However, most savings and other accounts that pay

compound interest compound it more frequently than
once per year.
• The interval between successful conversions or

compounding is known as conversion period which
could be annually, semi-annually, quarterly,
monthly or daily (not usually done though).

• To account for intra-period compounding the
equation above would be modified by dividing the
interest rate r by the number of compounding
periods, k, that exist per year, and multiplying the t
years by k compounding periods per year.
FVt = (PVo) * (1+r/k)t*k

where k is the number of compounding periods per
year.
• For the previous example where GHC1000 investment was

held four years earning 6% as interest, if we assume
quarterly compounding,
• we achieve the following future value:

FVt = (1000) * (1+ 0.06/4)4*4
FVt = (1000) * (1.015)16
FVt = GH¢ 1,269

Intra-period discounting
PV = FV / (1 + r/k) (t*k)

Other Topics (in Exercise book)
If time permits:
• Comparing rates – effect of compounding
• Inflation and Interest Rates – Real and Nominal
rates – Purchasing power - Fisher effect

Lecture Eight
Capital budgeting

CAPITAL BUDGETING
• The process of evaluating and selecting long-term
investments that are consistent with the goals of
shareholder’s (owner’s) wealth maximization
• The process of planning significant outlays on

projects that have long-term implications on the firm
• Evaluating the profitability of the firm’s potential

investments in new property and equipment
(Beierlein et al., 2007)
Importance of capital budgeting decisions
to the success of the firm
• Minimises financial losses
• Affects the firm’s long-term operations and

future cost structures - to influence the
profitability of the firm
• Investment guide – selection of alternative

investment potentials.
Difficulties with capital budgeting
➢Uncertainties and risks that cannot be
completed avoided
➢Costs and benefits occur in different time

periods
➢May not be possible to calculate in strict quantitative

terms all benefits or costs associated with a
particular investment decision
What can we do as managers?
➢Fully account for the timing and amount of
capital required for the investment
➢Fully account for the timing and benefits

likely to result over the life of the investment
➢Objectively evaluate capital budgeting

decisions so management can maximize long-term
profits (Beierlein et al. 2007).

Capital budgeting decisions
Accept-Reject Decisions
➢ All independent projects exceeding the set rate of return
are accepted – rank projects
Mutually Exclusive Project Decisions

➢ the acceptance of one will exclude the others from further
consideration
Capital Rationing Decision

➢ When a firm has only a fixed amount to allocate among
competing capital expenditures – Internal or external
rationing
Capital budgeting techniques
There are basically two categories of techniques used in
evaluating investments:
Those that do not consider the TVM
– Payback method
– Simple Rate of Return (or Accounting Rate of Return)
– Ranking by inspection
– Proceeds per unit of outlay
– Average annual proceeds per unit of outlay
Those that consider the TVM

– Net PresentValue (NPV)
– The Benefit-Cost Ratio Method, BCR (Profitability Index - PI)
– The Internal Rate of Return Method (IRR)
1. Payback period method
➢ The method calculates the number of years it takes an investment
to recoup its initial cash outlay/investment.
➢ A project with a shorter payback period is considered.
Payback period = Investment required / Net annual cash inflow

Example 1:
• Suppose a farmer is considering buying a new combine harvester
that will cost GH180,000 cash. The farmer has been relying on
custom harvesters in the past and estimates that having her own
harvester will increase her net cash flows by GH30,000 pa.
Calculate the payback period = (Year 6)
• Assuming repairs will increase by GH10,000 after the third year

and make the net cash flows GH20,000 after the third year.
Calculate the payback period = (Year 8)
Payback period method – Example 2
• A juice Company is considering to purchase a new equipment to increase the
production and revenues. The useful life of the equipment is 10 years and the
company’s maximum desired payback period is 4 years. The inflow and
outflow of cash associated with the new equipment is given below:
• The initial cost of equipment $37,500 Annual cash inflow: Sales $75,000
Annual cash outflow: Cost of ingredients $45,000 Salaries expenses
$13,500 Maintenance expenses $1,500 Non cash expenses: Depreciation
$5,000 Required: Should the Company purchase the new equipment? Use
payback method.
Solution:
• Computation of net annual cash inflow:
• $75,000 – ($45,000 + $13,500 + $1,500) = $15,000
• Payback period = $37,500/$15,000 =2.5 years
• Depreciation is a non cash expense and therefore has been ignored.
• According to payback method, the equipment should be purchased because
the payback period of the equipment is 2.5 years which is shorter than the
maximum desired payback period of the company.
Advantages and disadvantages of payback period
Advantages:
➢Simple to calculate
➢Easy to understand
➢It saves time - investment proposals that do not provide the
payback period within the specified period may not be consider
Disadvantages:
➢It ignores cash flows occurring after the payback period
➢It does not consider the time value of money .........
➢....... hence, not a true measure of the profitability of an
investment
160
2. Simple rate of return (SRR) method
➢ Also known as the accounting or arithmetic rate of return (ARR)
➢ Is equal to the net income from an investment as a percentage of the
initial outlay needed to acquire the asset(s)
Simple rate of return =
ARR = Av. accounting profit / Av. Investment
➢ When faced with alternative investment opportunities for the

same limited resource (money), the manager should select the
option with the highest rate of return.
➢ When faced with potential investments, a manager should choose

only those opportunities whose rate of return equals or exceeds
the minimum rate set by the firm

Example - Simple rate of return (SRR)
➢ Suppose a cold store operator is considering building a new
cooling facility with total cost GH1,500,000, and the net
income to accrue from the facility is GH440,000.
The simple rate of return would be:

➢ Simple rate of return = = 0.29.33 = 29.9%
➢ So will the firm accept this project?

➢ Well, it depends on the firm’s policy on acceptance or
otherwise of a project
Example 2 - Simple rate of return (SRR)
• An initial investment of $130,000 is expected to generate annual
cash inflow of $32,000 for 6 years. Depreciation is allowed on
the straight line basis. It is estimated that the project will
generate scrap value of $10,500 at end of the 6th year. Calculate
its accounting rate of return assuming that there are no other
expenses on the project.
• Solution
Annual Depreciation = (Initial Investment − Scrap Value) ÷
Useful Life in Years
Annual Depreciation = ($130,000 − $10,500) ÷ 6 ≈ $19,917
Average Accounting Income = $32,000 − $19,917 = $12,083
Accounting Rate of Return = $12,083 ÷ $130,000 ≈ 9.3%

Advantages and disadvantages = SRR method
Advantages:
➢Simple to calculate
➢Easy to understand
Disadvantages:
➢It ignores the time value of money.
➢It focuses on accounting profit rather than cash flows.
➢May not be desirable in some years due to variation in
accounting profit over the life of the project.

3. Ranking by inspection
• There are times in project investment analysis where selection is
done...
• ... just by looking at the costs of investment of the project and...
• ... the stream of flow of revenues or the value of incremental
production (and the timing of the flow).
Two instances where ranking by inspection might be used to

assess projects:
1. When two projects with the same investments produce the
same net value of incremental production for a period, but one
continues to earn longer than the other.
2. When the two projects with the same investments produces
the same net value of incremental production throughout but
one project has more of the flow earlier in the time sequence.
Ranking by inspection - Example
• The management of Cocoa Processing wants to reduce its labor cost by
installing a new machine. Two types of machines are available in the
market – machine X and machine Y. Machine X would cost $18,000
where as machine Y would cost $15,000. Both the machines can reduce
annual labor cost by $3,000.
• Required:Which is the best machine to purchase according to payback
method?
Solution:
Machine X Machine Y
Cost of machine (a) $18,000 $15,000
Annual cost saving (b) $3,000 $3,000
Payback period (a)/(b) 6 years 5 years
• According to payback method, machine Y is more desirable than

machine X because it has a shorter payback period than machine X.
4. Proceeds per unit of outlay
• Obtained by dividing the total net value of incremental
production by the capital investment.
• The higher the value the better the project.
5. Average annual proceeds per unit of outlay

• The total net value of incremental production is first
divided by the number of years it takes the project to realise
this amount and this average value (average net value of
incremental production) is divided by the original outlay of
capital items
Capital budgeting decisions with TVM
1. Net PresentValue (NPV)
➢ Defined as the PV of an investment’s cash inflows
(Benefits) minus the PV of its cash outflows (Costs).
NPV = ∑PV cash inflows – ∑PV cash outflows
➢ A firm should invest in projects with a positive NPV

(that is, the PV of the benefits > PV of costs).

Steps in determining the NPV
➢ Estimate the value and timing of the cash inflows (B) and
outflows (C) for the productive life of the asset(s).
➢ Calculate PVs of the future cash inflows by discounting the

future cash inflows (Benefits).
➢ Calculate PVs of future cash outflows by discounting the

future cash outflows (Costs).
➢ Final step is to calculate the NPV by subtracting the sum of

the PV outflows (costs) from the sum of PV inflows
(Benefits).
Net Present Value (NPV) - Example
➢ Suppose a cattleman has the opportunity to buy a herd of young cows
from her neighbour for GH40,000. The cattleman estimates he would
keep the cows for six more years and then sell them for a salvage
value of GH20,000. Annual cash revenues attributable to these cows
will be GH18,000 for each year of the six years. Cash expenses (i.e.
not including depreciation) will be GH10,000 per year
➢ At a discount rate of 12%, what is the NPV of this investment?
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Cash

flows
+18000 +18000 +18000 +18000 +18000 +18000 Inflows
+20000
(salvage
value)
-40000 -10000 -10000 -10000 -10000 -10000 -10000 Outflows
NPV Solution cont’d
➢ We then treat the annual net flows of GHC 8,000 as a six
year ordinary annuity
➢ So what is an annuity?
➢ Annuity factor for six years at 12% is 4.1114
➢ Multiplying this factor by GH8,000, the present value of the
annuity is calculated to be GH32,891.26
➢ The other cash inflow is the GH20,000 salvage value.
Multiplying this by the present value factor for six years at
12% discount rate (0.5066) gives GH10,132.6
➢ Therefore, the total present value of inflows is
GH43,023.86
NPV Solution cont’d
➢ The only cash outflow not already accounted for is the
initial purchase price of GH40,000
➢ It will not be discounted. WHY?
➢ Therefore, the present value of the cash outflows equals
GH40,000.
➢ NPV at 12% = GHC 43,023.88 - GHC 40,000
➢ = GHC 3,023.88
➢ Since the NPV is positive, it tells the investor she is earning
a compound return that exceeds the discount rate by GHC
3,023.88. In other words, the investment pays a
compound return of 12% plus a positive NPV of
GHC 3,023.88
NPV Solution – AnotherApproach
Year Outflows Inflows Net flow DF DCF
0 40000 0 -40000 1 -40000.00
1 10000 18000 8000 0.8929 7142.86
2 10000 18000 8000 0.7972 6377.55
3 10000 18000 8000 0.7118 5694.24
4 10000 18000 8000 0.6355 5084.14
5 10000 18000 8000 0.5674 4539.41
6 10000 38000 28000 0.5066 14185.67
4.1114 3023.88
Annuity factor
( Yr1-6) NPV
2. The benefit- cost ratio method
(profitability index)
➢ BCR =
➢ For an investment to be accepted, the value of the ratio

should be greater than 1.0
➢ The steps involved are similar to that of NPV except this is
the ratio not the difference of the two value, inflow &
outflow

BCR sample & solution
➢ Using the question used under NPV...

➢ BCR = 84,137.95 / 81,114.07 = 1.0372
➢ Generally, the higher the benefit-cost ratio the better it is

for the company
➢ A benefit-cost ratio of greater than one corresponds to a
positive NPV meaning the benefits of the project is more
than the cost of capital and the project should be accepted
➢ Conversely, a B/C of less than one occur when the NPV is
negative, and the investment should be rejected

Advantages and Disadvantages of benefit- cost ratio
(BCR)
Advantages
➢ It recognizes the time value of money
➢ It considers the total benefits arising out of the project over
its life time
Disadvantages
➢ It is difficult to calculate and understand
➢ It is difficult to use relative to the payback and simple rate
of return methods

Internal rate of return (IRR)
➢ The objective of the IRR analysis is to find the unique
discount rate at which the present value of the cash inflows
equals the present value of the cash outflows.
➢ In other words, the discount rate that makes NPV = 0.
• Generally, the higher a project's IRR, the more desirable ...

• Assuming all other factors are equal among the various
projects, the project with the highest IRR would probably
be considered the best and undertaken first.
• The decision rule is to accept project investments

with an IRR greater than or equal the opportunity
cost of investment.
Advantages & disadvantages of IRR
Advantages of the Internal Rate of Return (IRR) method
• It recognizes the time value of money
• It considers the total benefits arising out of the project over
its life time
Disadvantages of the Internal Rate of Return (IRR)

method
• The calculations require an iterative, trial-and-error process
that can be very tedious.
• The procedure produces multiple rates that can be confusing

Formula of IRR
24/05/2022 179
Example - IRR
• Suppose an agricultural manager is considering the purchase
of a new office equipment. The initial cost would be
GH20,000. These cost and net annual benefits over a five-
year life are presented below:
Year 0/Now -20,000
Year 1 +9000
Year 2 +8000
Year 3 +7000
Year 4 +5000
Year 5 +3000
• What is the IRR of this project?
Solution - IRR
• What discount rate should we start with?
• Any will do but after the first round of calculation....

• ...you need to use experience and common sense to
choose the next discount rate
• A useful clue is that the higher the discount rate, the

lower will be the value of the discount cash flows or the
NPV as seen from the discount factor formula
• Let’s work out the solution then

End

ABM251 - AgribusinessPlanning&Analyss (1) - 1

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

ABM251 - AgribusinessPlanning&Analyss (1) - 1

Uploaded by

Copyright:

Available Formats

ABM 251:

Agribusiness Planning & Analysis

Dr. (Mrs) Gifty Boakye Appiah

ABM 251: Agribusiness Planning & Analysis 1

ABM 251: Agribusiness Planning & Analysis 2

At the end of this course, students should be able to:

ABM 251: Agribusiness Planning & Analysis 3

ABM 251: Agribusiness Planning & Analysis 5

ABM 251: Agribusiness Planning & Analysis 9

The Project/Business Cycle:

Planning means preparing for action.

What is your plan for this semester?

If you fail to plan, then you plan to fail

ABM 251: Agribusiness Planning & Analysis 12

What really distinguishes a successful and an unsuccessful

ABM 251: Agribusiness Planning & Analysis 16

ABM 251: Agribusiness Planning & Analysis 17

• A corporate mission statement defines what the

• It forms the building block for an overall strategy and

• Creating a mission statement is one of the first actions an

• Note: the use of ‘IS ....’

NOTE: A mission statement should be more than words on a

How relevant is aVISION statement?

Note: the use of ‘IS TO BE ....’

• Aiming at being the market leader is not enough. The

• A strategy is a careful plan or method for achieving a

So, what is your strategy for excelling this semester and at

Source: National Treasury, Republic oof south Africa, 2010

ABM 251: Agribusiness Planning & Analysis 26

ABM 251: Agribusiness Planning & Analysis 27

• Long-term (usually 3-10 years) • Short-term (1 year or less)

• What capacity do we have/what can we do?

• What problems are we addressing?

• What difference do we want to make?

• Which critical issues must we respond to?

• Where should we allocate our resources?/what should our

ABM 251: Agribusiness Planning & Analysis 31

2. A strategic plan helps an organization to create and maintain a

3. It provides a framework for programmes that help the

4. It also helps identify what changes may be necessary for the

5. Provides a framework against which to monitor progress, learn

ABM 251: Agribusiness Planning & Analysis 34

ABM 251: Agribusiness Planning & Analysis 37

ABM 251: Agribusiness Planning & Analysis 38

❖May not be responsive enough for rapidly changing

❖Does not take into account unexpected events

ABM 251: Agribusiness Planning & Analysis 39

ABM 251: Agribusiness Planning & Analysis 40

• What are the types of proposal?

• What is the difference (if any) between a business plan and a

• How to write a business proposal

ABM 251: Agribusiness Planning & Analysis 41

Business plan Business proposal

ABM 251: Agribusiness Planning & Analysis 44

• You therefore need to understand the customer’s situation and

• Failure to focus on the specific needs of the customer

ABM 251: Agribusiness Planning & Analysis 45

• An effective proposal describes not what

ABM 251: Agribusiness Planning & Analysis 46

ABM 251: Agribusiness Planning & Analysis 47

• Solicited means invited whereas unsolicited means

• A solicited proposal is when the customer requests