The concept and calculation of return on investment (ROI) is pretty simple. It can be measured as net income divided by the original capital cost of the investment. The higher the ratio, the greater the benefit earned.
Yet, ROI is often poorly defined, sometime inaccurately
calculate or assumed and it may not be as sound as you first plan.
ROI can be helpful when you are:
- Considering
uncertainty.
- Comparing
or benchmarking alternatives.
- Evaluating
performance over time.
Some economic advisors suggest this ROI checklist:
- Identify
all costs and potential revenue. Start with a clean sheet of paper.
- Evaluate
alternatives. Challenge your thinking.
- Review
key assumptions and possible outcomes.
- Consider
constraints: capital, labor, etc.
Higher commodity prices are available and you may think that
you may be in the market to make an upgrade or new investment on your farm. You
may want to do so with a realistic frame of mind and not overlook the potential
additional or long-term costs.
You should have a goal to define the minimum benefit your
farm needs to realize or gain too cover the total costs for the investment.
Some additional items to remember:
- Product
return price for production improvement: Projected price for the you will
be using to evaluate your margin of gain in return.
- Feed/Grain/Equipment/Genetic
addition price Investment Cost Per Animal/Acre: How much will it cost to
make this enhancement or upgrade?
- Yield
Improvement Per Animal Unit/Acre: This is your best educated guess for production
improvement.
- Animal
Units/Acres: Across how many AU/acres will you use this margin enhancement
on?
- Years
of Use: How many years do you plan to use this margin enhancement?
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