AGR715 – FINANCIAL MANAGEMENT IN AGRICULTURE

Siti Zuwairiah binti Abdullah (2020296442)

3 November 2020 1
CONTENTS

Topic: Capital Budgeting

 Payback Period
 Present Value

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PAYBACK PERIOD

This is the simplest form of investment measure.

Reason for its use:
 It’s easy to understand, easy to apply and easy to explain.
 It work in real life because it normally correlates pretty
closely to the more sophisticated forms of analysis.
 It is easy to understand.
 Many large companies rely on payback and payback alone
in making project decisions.
 It helps cash flow because no matter how good in return a
project makes in the long term, if a company is struggling
with short term cash flow, payback can be equally
impoertant.

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SO WHAT IS PAYBACK?

Example 1:
You are planning to spend RM10,000 on a new fork-lift to save
RM500 per month on maintainace bills.

Payback period is : Initial Cost RM10,000

Monthly Saving RM500

The initial investment of RM10,000 is recovered after 20

months.

Payback is 20 months.
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SO WHAT IS PAYBACK?

Evalution:

 Payback is the length of time taken to cover initial

investment.
 The shorter the payback period, the better the project.
 The better and quicker the returns, the shorter the payback.

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SO WHAT IS PAYBACK?

Decision criteria:
Consider how certain are the outcomes. Can the factory
managers really demonstrate that he can make these
maintenance saving?

As a rough guideline, payback periods might be considered as

follows:
Two years or less – very attractive;
Three years or four years – quite attractive;
Five years and over – less attractive.

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PRESENT VALUE (PV)

• PV or Present Value is the sum of all future cash flows

discounted at a specific rate of return. Present value is also
known as a discounted value, and it helps in determining the
fair value of future revenues or liability.
• The calculation of present value is a very important concept
in finance and is also used in calculating the valuations of a
company. 

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PRESENT VALUE (PV)

The present value is calculated using the equation:

Where

FV=Future value,
r= rate of return,
n=number of period (year)

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HOW TO CALCULATE PRESENT VALUE

Using this formula, we can calculate that to receive

RM108.16 in 2 years at a 4% rate of return, the
amount to be invested now is:

RM108.16 = RM100
(1+0.04)2