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What is the Big Picture?
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What is a strategic capital expenditure decision?
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Why make strategic capital expenditure decisions?
Allows the business to
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What information do you need to make a strategic capital expenditure decision?
Financial information
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Goals / aspirations of the business.
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What is capital?
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The capital requirement for the business.
Businesses have 3 distinct phases;
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Assets.
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Credit & borrowed capital.
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What is credit.
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Types of Loans
Use The use or the purpose of the loan is another common system of classification.
The security for a loan refers to the asset or assets pledged or mortgaged to the lender to ensure loan repayment. If the borrower is unable to make the necessary principal and interest payments on the loan, the lender has the legal right to take possession of the mortgaged assets. The lender typically sells the assets & the proceeds used to pay off the loan. Assets which are pledged or mortgaged as security are called loan collateral.
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Sources of capital.
Under certain circumstances, there are other institutions that will lend money for land, stock, plant & development, e.g. building societies, insurance companies. Once you start looking past standard lending institutions, you tend to be paying premium interest rates. |
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Financing options
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Factors affecting credit & lending margins
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Read “Chris Horan St Pauls Agribusiness day 2” PPT
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The financial package
There are many components to any financial package that can influence the cost of capital.
Interest
There are many components to any financial package that can influence the cost of capital.
Interest
- Interest can be thought of as the rent paid for the use of borrowed money. The interest rate offered by the lending institution will depend on the level of risk they think is involved & the wholesale interest rate.
- With a floating rate, loan repayments rise & fall with changes in interest rates. In economic times of changes in interest rates this can make cashflow budgeting more difficult. Principal can usually be paid in lump sums or in full at any time.
- With this type of loan the interest rate is fixed for a specific period of time. This makes cashflow budgeting easier, but there may be restrictions or penalties if the loan is repaid or the loan amount is changed before that specified period of time.
- The loan application fee will vary depending on the lending institution, the proposal, & the information the applicant provides. (The more financial information provided; budgets, cashflows etc., the greater the chance of reduced fees).
- Loan application fees are negotiable & vary from no cost to 1% of the amount to be borrowed.
- These vary from a flat fee on a monthly basis, to a charge per transaction, or a combination of both (e.g. per cheque, per electronic transfer, etc.). If using electronic banking, the greater the potential to reduce costs.
- These fees are charged on some short-term loans, for the ability to have seasonal finance when required.
- There will be legal fees required to be paid for the checking of documentation, & the registration of securities. When a loan is repaid there will be a fee for discharging the mortgage. Mortgage related legal fees are tax deductible.
- Some loans have flexible repayment schedules, whereas in other cases penalties apply for early repayment.
Selecting a lending institution
The whole package is made up of many components; interest rates, fees, advice, repayment terms, services, etc, all these should be assessed together to gain an understanding of the whole package, & the cost involved. Finance brokers, consultants, accountants, etc, may be of help in selection & negotiation.
- An agribusiness loan is a major expense & commitment & so a borrower should be prepared to invest time & effort into ensuring that their financial arrangements are properly made. Factors to consider are:
- To have effective control of the business, certain products such as internet & telephone banking may be essential.
- It is an advantage to have lending staff who are knowledgeable & understand agribusiness in your area, & who will offer high quality support & advice.
- Is the lending institution going to give long-term support to your type of business, or are they only involved during the ‘good times’?
The whole package is made up of many components; interest rates, fees, advice, repayment terms, services, etc, all these should be assessed together to gain an understanding of the whole package, & the cost involved. Finance brokers, consultants, accountants, etc, may be of help in selection & negotiation.
Sensitivity analysis
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Read “Financial Management” article.
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SWOT analysis
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Cost Benefit Analysis
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Explain and evaluate the effects of the financing options and the consequences of these options on the business. Students need to analyse the financial options & evaluate the consequences of these options on the business using both non-financial and financial information.
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Recommendation – select an option.
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Complete Hamills w/s
XP Homeware sells fridges w/s. ![]()
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dsl_plant_brief_022019_final.pptx | |
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agribusiness3_9b_v1_dec17-4.docx | |
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