The next $120,000: A case study to illustrate analysis of alternative farminvestments in fixed assets

Dairy scientists specializing in the area of farm management are increasing ly involved in analysis of farm investments in fixed assets. There have bee n instances where the wrong procedures were used to assess investments in f ixed assets, leading to erroneous and possibly disastrous conclusions. A de tailed case study of a dairy farm facing the decision of where best to inve st an unexpected $120,000 windfall is used to illustrate the various facets of financial analysis. Indicators of profitability, liquidity, solvency, r epayment capacity, and financial efficiency are explained and applied to th e farm case to produce a detailed analysis of the current financial positio n of the firm. Long-range budgets of four alternate investment options and their impact on all financial indicators are presented. The four options ar e: 1) to pay down debt, 2) to purchase an additional 100 cows, 3) to instal l automatic milk yield recording in the parlor, and 4) to build new heifer facilities. All four investments are profitable. Therefore, an analysis lim ited to profitability indicators would conclude that any of the four option s is a good investment. However, liquidity and financial efficiency issues showed that the option of purchasing 100 cows is far superior to the three others. We conclude that a complete and thorough financial analysis is requ ired to evaluate the impact of long-run investments in fixed assets.