Compare Rate of Return on Your Investments

April 17, 2012 08:01 AM

The following information is a Web Extra from the pages of Farm Journal. It corresponds with the article "Do the Best You Can with the Land You Have." You can find the article in Farm Journal's Late Spring 2012 issue.



There are many different calculations that you can use to compare on-farm investments to see which one will give you the best ROI. The Modified Internal Rate of Return (MIRR) is one of the best to determine where to put your money. In "The Bottom Line" column, Moe Russell compares the ROI between an investment of more land or a land improvement project like tiling, which will increase grain crop yields.
MIRR is the rate at which your initial expenses equals the present value of your expected cash flows that are appreciated at the average cost of borrowed money (WACC).
This WACC can be complicated if there are many different forms of collateral which are weighted by market or perceived value, but to keep it simple, this can be the interest rate you expect to pay.
You also need the percentage you expect to receive on each year’s positive cash flows, or the rate at which those returns are reinvested. This is typically the same percentage as the weighted borrowing costs.
The math of the MIRR calculation can look scary, but thanks to Microsoft Excel, the heavy lifting is done for you. It’s really quite simple, once you know something about your borrowing costs and returns over the number of years of the investment.
(Click the table to download the Excel version for your own calculations.)
WACC = (cell B2)the cost of money borrowed was set at 4% and re-investment on our return was equal to 4%.
Time = (cells B3 to L3) the number of years of cost and returns you will reinvest back into the project (i.e. 10 yrs.)
Cash Flow= (cells B4 to L4) Moe’s tiling example cost was $500 per acre or $50,000 per 100 acres. Based on his research from Ohio State University, he estimated corn would increase by 25 bu. per acre with tiling and he would yield another 10 bu. per acre of beans. His price was set at $5 per bu. for corn (100 acres X $5 X 250 bu.= $125,000) and $12.50 per bu. for soybeans (100 acres X $12.5 X 65 bu.= $81,250)
MIRR= (type in cell B5) =MIRR(B4:L4,B2,B2)
A MIRR of 38% beats a 8-9% return from the stock market any day. To compare the returns on tiling the land you own versus buying more land, you would run a MIRR computation on the land you are looking to purchase and then compare the two MIRR values.




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