Purbanchal University

HIMALALYAN COLLEGE OF AGRICUTLURAL SICEINCE AND TECHNOLOGY (HICAST)

Internal Assignment 2017
Program: MSc Agriculture (Agribusiness Management) Full Marks: 100; Pass Marks: 40
Subject: Financial and Accounting Management (MFM 513) Submission deadline:
Assignment prepared by: Basudev Sharma, M.Sc.Ag. (Agribusiness Management), 1st Semester
GROUP A: LONG ANSWER QUESTIONS (10X3 = 30)
1. How do you define agriculture finance? Explain the significance of studying finance in context
of Nepalese agribusiness with examples. (10)
Answer
In general meaning, finance is the management of money and other valuables, which can be
easily converted into cash. It is also defined as the management of large amounts of money,
especially by government or large companies. Finance also refers to the provide funding for a
person or enterprise.

Finance is the discipline of economics that deal with allocation of assets and liabilities over
time under consideration of certainty and uncertainty. It studies and addresses the ways in
which individuals, business and organizations raise, allocate and use monetary resources over
time, taking into account the risk entailed in their projects. Finance is the science that
describes the management, creation and study of money, banking, credit, investments, assets
and liabilities.

In an economic sense, an investment is the purchase of goods that are not consumed today
but are used in the future to create wealth. In finance, an investment is a monetary asset
purchased with the idea that the asset will provide income in the future or will be sold at a
higher price for a profit.

Agriculture is the science or practice of farming, including cultivation of the soil for the growing
of crops and the rearing of animals to provide food, wool, and other products. It is also defined
as the science, art, or occupation concerned with cultivating land, raising crops, and feeding,
breeding, and raising livestock; farming.

Agricultural finance refers to financial services ranging from short, medium and long-term
loans, to leasing, to crop and livestock insurance, covering the entire agricultural value chain,
input supply, production and distribution, wholesaling, processing and marketing. The need for
investing in agriculture is increasing due to a rising global population and changing dietary
preferences of the growing middle class in emerging markets toward higher value foods (e.g.
dairy, meats, fish, fruits, vegetables, etc.). Agricultural Finance is the economic study of

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acquisition and use of capital in agriculture. It deals with the supply and demand of funds in
agriculture sector of the economy. Agriculture Finance is the study of the financial institutions,
which provides loans for funding in agriculture, and financial markets in which these
institutions obtain the funds for providing loan. Agriculture Finance is also defined as all the
intermediaries that create interfaces between agriculture and rest of the macro economy,
including the effects of national economic policies that affect the agriculture and financial
position of farmers.

Significance of Agricultural Finance:

1) Agriculture finance assumes vital and significant importance in the agrosocioeconomic
development of the country both at macro and micro level.
2) It is playing a catalytic role in strengthening the farm business and augmenting the
productivity of scarce resources. When newly developed potential seeds are combined
with purchased inputs like fertilizers & plant protection chemicals in appropriate, requisite
proportions will result in higher productivity.
3) Use of new technological inputs purchased through farm finance helps to increase the
agricultural productivity.
4) Accretion to in farm assets and farm supporting infrastructure provided by large scale
financial investment activities results in increased farm income levels leading to increased
standard of living of rural masses.
5) Farm finance can also reduce the regional economic imbalances and is equally good at
reducing the interfarm asset and wealth variations.
6) Farm finance is like a lever with both forward and backward linkages to the economic
development at micro and macro level.
7) As agriculture is still traditional and subsistence in nature, agricultural finance is needed to
create the supporting infrastructure for adoption of new technology.
8) Agribusiness development is possible only with agro industrial development and for that
regular supply of agro inputs will be essential and agro finance can play significant role in
helping farmers or input suppliers for production and delivery of the inputs for
manufacturing and processing processes.
9) Risk and uncertainty are more in agriculture like flood, drought, disease and pest
infestation, etc. and under such natural calamities agricultural finance helps to continue
farm activities as well as sustain their livelihood.
10) Agriculture finance has significant role in breaking vicious poverty cycle of farmers
injecting cash in production operations.
11) Agricultural finance is significant discouraging subsistence farming and making capable of
commercial production for agribusiness development in Nepal.

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 12) Large amount of investment are needed for growing agribusiness at national as well as
global level and for this agricultural finance has significant importance. Similarly there can
be many direct and indirect significance of agricultural finance in agribusiness
development in Nepal.
13) Massive investment is needed to carry out major and minor irrigation projects, rural
electrification, installation of fertilizer and pesticide plants, execution of agricultural
promotional program and poverty alleviation program in the country.

Source:
http://www.worldbank.org/en/topic/financialsector/brief/agriculture-finance
http://www.ifc.org/wps/wcm/connect/Industry_EXT_Content/IFC_External_Corporate
_Site/Industries/Financial+Markets/Retail+Finance/Agriculture+Finance/
http://www.mfw4a.org/agricultural-rural-finance/agricultural-rural-finance.html
http://gomalagriculturejournal.yolasite.com/resources/Agricultural%20Finance.pdf

2. What is financial market? Explain the role of financial intermediaries in agriculture value chain. (10)

Answer
A financial market is a market in which people trade financial securities, commodities, and
other fungible items of value at low transaction costs and at prices that reflect supply and
demand. Securities include stocks and bonds, and commodities include precious metals or
agricultural products. Financial markets might seem confusing, but at their heart they exist to
bring people together so money flows to where it is needed most. In economics, typically, the
term market means the aggregate of possible buyers and sellers of a certain good or service
and the transactions between them. It means that the investors can invest their money,
whenever they desire, in securities through the medium of financial market. They can also
convert their investment into money whenever they so desire.

Financial markets perform the essential function of channeling funds from economic players
that have saved surplus funds to those that have a shortage of funds at any point in time in an
economy, there are individuals or organizations with excess amounts of funds, and others with
a lack of funds they need, for example to consume or to invest. Exchange between these two
groups of agents is settled in financial markets. The first group is commonly referred to as
lender and the second group is commonly referred to as the borrowers of funds.

There exist two different forms of exchange in financial markets. The first one is direct finance,
in which lenders and borrowers meet directly to exchange securities. Securities are claims on
the borrowers future income or assets. Common examples of securities are stock, bonds etc.
The second type of financial trade occurs with the help of financial intermediaries and is
known as indirect finance. In this scenario borrowers and lenders never meet directly, but

3
lenders provide funds to a financial intermediary such as a bank and those intermediaries
independently pass these funds on to borrowers.

A financial intermediary is an institution or individual that serves as a middleman for different

parties in a financial transaction or it is an institution, such as a bank, building society, or unit-
trust company, that holds funds from lenders in order to make loans to borrowers. That is,
savers (lenders) give funds to an intermediary institution (such as a bank), and that institution
gives those funds to spenders (borrowers). Financial Intermediaries in chart;

Role of financial intermediaries in agriculture value chain:

It transfers the metropolitan funds to rural funds & makes loan accessibility.
It supply large sum of money to farmers in financing their large need of seasonal operating
funds and acquisition of short-term depreciable assets along with long-term acquisition of
real estates.
It harmonizes the liquidity need of savers with the liquidity of farm securities.
It helps to flow the fund from the area of site of higher savers to the area of higher needs
of credit.
It also transfers the funds from rural to urban economies if rural economy demands fewer
funds than the savings.
It provides credit to the rural enterprises which helps to,
Create and maintain the adequate size of the farm business.
Increase in efficiency of farm business.
Meets seasonal and annual fluctuations of income and expenditures of an agribusiness
firm.

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 Protect against adverse conditions: weather, disease, price uncertainties etc.
Provide continuity to the farm business during lack of funds.
It can improve economic efficiency in at least five ways, by: 1) facilitating transactions; 2)
facilitating portfolio creation; 3) easing household liquidity constraints; 4) spreading risks
over time; and 5) reducing the problem of asymmetric information.
Segment the smallholder farmers and identify their financial needs. Smallholder farmers
are heterogeneous and have different needs. It is important to identify various smallholder
sub-segments and assess their needs and constraints before designing solutions and
products. Also, smallholder farmers don't just need credit for agricultural activities but they
also need credit for other household needs/activities, savings, payment systems and
insurance.
Find ways to de-risk agricultural finance by addressing both idiosyncratic (or individual)
risks as well as important systemic risks. Individual risks are often linked to credit risk
assessment, and information and systems to help. Information can assist financial
institutions in credit risk assessment by promoting credit bureaus and linkages with value
chain companies, etc. Finding good collateral, for example, moveable collateral and not just
rely on titled land, could also help. On the systemic risk, agricultural insurance, catastrophic
risk programs, price hedging through commodity exchanges or value chains, can also
provide some solutions.
Identify appropriate institutions and delivery channels that would reduce the costs of serve
agricultural clients. A variety of institutions can provide agricultural finance, depending on
the types of clients they serve. Financial institutions and cooperatives can serve sub-
segments of small holder farmers through their local presence and expertise. Commercial
banks can also provide solutions through value chains and for better organized groups of
smallholders. New technologies and advancements in mobile banking solutions as well as
increasing integration of farmers into better organized value chains can promote solutions
and delivery channels that reduce the cost of serving disperse populations in rural areas.
Address issues in the enabling environment and specific government policies that limit the
flow of financial services to small holders. Government policies can restrict lending but also
can crowd in private sector.

Source:
https://en.wikipedia.org/wiki/Financial_market
http://www.worldbank.org/en/topic/financialsector/brief/agriculture-finance
http://www.investopedia.com/walkthrough/corporate-finance/1/financial-
markets.aspx
https://www.researchgate.net/publication/227654623_The_Role_of_Financial_Interm
ediaries_in_Capital_Market
http://study.com/academy/lesson/financial-intermediaries-definition-types-role-
advantages.html

5
 https://www.google.com.np/url?sa=t&rct=j&q=&esrc=s&source=web&cd=13&cad=rja
&uact=8&sqi=2&ved=0ahUKEwio3ZWJhejUAhXKr48KHY-
HCf0QFghhMAw&url=http%3A%2F%2Fhighered.mheducation.com%2Fsites%2Fdl%2Ffr
ee%2F0070951594%2F356658%2Fchapter03sg_5ed.doc&usg=AFQjCNEHF1vhrSCfTtdM
_BnXzI3EQ2Pvqw

3. What is capital budgeting? Briefly describe the different Capital budgeting techniques along with
their respective decision criteria. (10)

Answer
Capital budgeting, or investment appraisal, is the planning process used to determine whether
an organization's long term investments such as new machinery, replacement of machinery,
new plants, new products, and research development projects are worth the funding of cash
through the firm's capitalization structure (debt, equity or retained earnings). It is the process
of allocating resources for major capital, or investment, expenditures. One of the primary goals
of capital budgeting investments is to increase the value of the firm to the shareholders.

Capital expenditure budget or capital budgeting is a process of making decisions regarding

investments in fixed assets which are not meant for sale such as land, building, machinery or
furniture. The word investment refers to the expenditure which is required to be made in
connection with the acquisition and the development of long-term facilities including fixed
assets. It refers to process by which management selects those investment proposals which
are worthwhile for investing available funds. For this purpose, management is to decide
whether or not to acquire, or add to or replace fixed assets in the light of overall objectives of
the firm. The terms capital expenditure are associated with accounting. Normally capital
expenditure is one which is intended to benefit future period i.e., in more than one year as
opposed to revenue expenditure, the benefit of which is supposed to be exhausted within the
year concerned.
Nature of capital budgeting can be explained in brief as under,
Capital expenditure plans involve a huge investment in fixed assets.
Capital expenditure once approved represents long-term investment that cannot be
reserved or withdrawn without sustaining a loss.
Preparation of coital budget plans involve forecasting of several years profits in advance in
order to judge the profitability of projects
There are two major techniques of capital budgeting.
1. Undiscounted method
Payback Period
Accounting/Simple Rate of Return

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2. Discounted method
Discounted Payback Period
Net Present Value
Internal Rate of Return
Profitability Index

1.1 Payback Period:

Payback period in capital budgeting refers to the period of time required to recoup the
funds expended in an investment, or to reach the break-even point. This is the number of
years it takes to payback the initial investment of a capital project from the cash flows that
the project produces. The time value of money is not taken into account. Payback period
intuitively measures how long something takes to "pay for itself." All else being equal,
shorter payback periods are preferable to longer payback periods. Payback period can be
calculated with the help of following formula,

Payback Period = Investment Required/Net Annual Cash Inflow

The net annual cash inflow is what the investment generates in cash each year. However, if
this investment was a replacement investment; for example, a machine replaced an
obsolete machine, then the net annual cash inflow becomes the incremental net annual
cash flow from the investment.

The decision criteria: If the payback period is less than the maximum acceptable payback
period, accept the project. But if the payback period is greater than the maximum
acceptable payback period, reject the project. The length of maximum acceptable payback
period is determined by management. The value is set subjectively on the basis of a
number of factors, including the types of project, the perceived risk of the project and the
perceived relationship between the payback period and share value.

1.2 Accounting/Simple Rate of Return

It is a measure of profitability obtained by dividing the expected future annual net income
by the required investment; also called accounting rate of return or unadjusted rate of
return. Sometimes the average investment rather than the original initial investment is
used as the required investment, which is called average rate of return. It is the rate of
return that results from dividing the income and capital gains from an investment by the
amount of capital invested.

Accounting rate of return (also known as simple rate of return) is the ratio of estimated
accounting profit of a project to the average investment made in the project. ARR is used in
investment appraisal. The rate of return is expressed as percentage of the earnings of the
investment in a particular project. The profits under this method are calculated as profit

7
 after depreciation and tax of the entire life of the project. It is very simple to understand
and use. This method takes into account saving over the entire economic life of the project.
Therefore, it provides a better means of comparison of project than the payback period.
This method through the concept of "net earnings" ensures a compensation of expected
profitability of the projects and it can readily be calculated by using the accounting data.
But it ignores time value of money, does not consider the length of life of the projects, is
not consistent with the firm's objective of maximizing the market value of shares and it
ignores the fact that the profits earned can be reinvested.

This can be calculated by using following formula.

The decision criteria:

Accept the project if ARR > minimum rate or required rate of return
Reject the project if ARR < required rate of return
This method ranks a Project as number one, if it has highest ARR, and lowest rank is
assigned to the project with the lowest ARR.
Limitations of ARR: It does not account for time value of money and quality of cost and
benefit is mixed. Larger benefits in early year and later are taken as of equal
importance.

2.1 Discounted Payback Period

The discounted payback period is the amount of time that it takes to cover the cost of a
project, by adding positive discounted cash flow coming from the profits of the project. The
advantage of using the discounted payback period over the payback period is that it takes
into account time value of money.

The discounted payback period is a capital budgeting procedure used to determine the
profitability of a project. A discounted payback period gives the number of years it takes to
break even from undertaking the initial expenditure, by discounting future cash flows and
recognizing the time value of money. The net present value aspect of the discounted
payback period does not exist in a payback period in which the gross inflow of future cash
flows is not discounted period.

The decision criteria: When using the discounted payback period for decision making, a
firm must first determine a discount rate at which to discount the future cash flow values
of a specified period of time. For example, they could discount the future cash flows for the
next 4 years. Once the discounted cash flow values have been calculated they should be
positive values. After that you follow the same procedure you would to calculating the
payback period. The discounted payback period should be in terms of years. If the

8
 discounted payback period is less than the predetermined period of time then the decision
rule is to accept the project. On the other hand, if the discounted payback period is greater
than the predetermined period then the decision rule would be to reject the project.

2.2 Net Present Value (NPV)

The net present value (NPV) or net present worth (NPW) is a measurement of the
profitability of an undertaking that is calculated by subtracting the present values (PV) of
cash outflows (including initial cost) from the present values of cash inflows over a period
of time. Incoming and outgoing cash flows can also be described as benefit and cost cash
flows, respectively. Net Present Value (NPV) is the difference between the present value of
cash inflows and the present value of cash outflows. NPV is used in capital budgeting to
analyze the profitability of a projected investment or project. Net present value (NPV) is a
sophisticated capital budgeting technique; found by subtracting a projects initial
investment from the present value of its cash inflows discounted at a rate equal to the
firms cost of capital. Mathematically it is written as,

NPV = Present value of cash inflows Initial investment

The decision criteria: If the NPV is greater than 0, accept the project. If the NPV is less than
0, reject the project. If NPV is equal to 0, this project adds no monetary value. Decision
should be based on other criteria, e.g., strategic positioning or other factors not explicitly
included in the calculation. If the NPV is greater than 0, the firm will earn a return greater
than its cost of capital. Such action should increase the market value of the firm, and
therefore the wealth of its owners by an amount equal to the NPV.

2.3 Internal Rate of Return (IRR)

The Internal Rate of Return (IRR) is a sophisticated capital budgeting technique; the
discount rate that equals the NPV of an investment opportunity with 0 (because the
present value of cash inflows equals the initial investment); it is the rate of return that the
firm will earn if it invests in the project and receives the given cash inflows. Internal rate of
return (IRR) is the interest rate at which the net present value of all the cash flows (both
positive and negative) from a project or investment equal zero. Internal rate of return is
used to evaluate the attractiveness of a project or investment.

The internal rate of return on an investment or project is the "annualized effective

compounded return rate" or rate of return that sets the net present value of all cash flows
(both positive and negative) from the investment equal to zero. Equivalently, it is the

9
 discount rate at which the net present value of future cash flows is equal to the initial
investment, and it is also the discount rate at which the total present value of costs
(negative cash flows) equals the total present value of the benefits (positive cash flows).
Mathematically IRR is calculated as,

The decision criteria: If the IRR of a new project exceeds a companys required rate of
return, or if the IRR is greater than cost of capital that project is desirable or the project
should be accepted. If IRR falls below the required rate of return, or if the IRR is less than
the cost of capital, the project should be rejected. These criteria guarantee that the firm
will earn at least its required return. Such an outcome should increase the market value of
the firm and, therefore, the wealth of its owners.

2.4 Profitability Index

Profitability index (PI), also known as profit investment ratio (PIR) and value investment
ratio (VIR), is the ratio of payoff to investment of a proposed project. It is a useful tool for
ranking projects because it allows you to quantify the amount of value created per unit of
investment. The profitability index is an index that attempts to identify the relationship
between the costs and benefits of a proposed project through the use of a ratio is simply
calculated as present value of cash inflows divided by the initial cash outflow.

Profitability index is an appraisal technique applied to potential capital outlays. The

technique divides the projected capital inflow by the projected capital outflow to
determine the profitability of a project. The main feature of using profitability index is the
technique disregards project size. Therefore, projects with larger cash inflows may result in
lower profitability index calculations because their profit margin is not as high. The
profitability index ratio is calculated as follows,

PI

The decision criteria: Assuming that the cash flow calculated does not include the
investment made in the project, a profitability index of 1 indicates breakeven. When
companies evaluate investment opportunities using the PI, the decision rule they follow is
to invest in the project when the index is greater than 1.0. A ratio of 1.0 is logically the
lowest acceptable measure on the index. Any value lower than one would indicate that the

10
 project's present value (PV) is less than the initial investment. As the value of the
profitability index increases, so does the financial attractiveness of the proposed project.

Profitability index calculations cannot be negative and must be converted to a positive

figure before they are useful. Calculations greater than one indicate the future anticipated
discounted cash inflows of the project are greater than the anticipated discounted cash
outflows. Calculations less than one indicate the deficit of the outflows is greater than the
discounted inflows and the project should not be accepted. Calculations that equal one
bring about situations of indifference where any gains or losses from a project are minimal.

Source:
https://en.wikipedia.org/wiki/Capital_budgeting
http://gomalagriculturejournal.yolasite.com/resources/Agricultural%20Finance.pdf
https://www.google.com.np/?gws_rd=cr&ei=JK9XWZrPGoTovgTD14HgBA#q=methods+
of+capital+budgeting
http://wps.aw.com/wps/media/objects/222/227412/ebook/ch09/chapter09.pdf
https://www.thebalance.com/payback-period-in-capital-budgeting-392916
https://www.allbusiness.com/barrons_dictionary/dictionary-simple-rate-of-return-
4946259-1.html
http://www.investopedia.com/terms/d/discounted-payback-period.asp
https://en.wikipedia.org/wiki/Net_present_value
http://www.investopedia.com/terms/n/npv.asp
https://en.wikipedia.org/wiki/Internal_rate_of_return
http://www.investinganswers.com/financial-dictionary/investing/internal-rate-return-
irr-2130
https://en.wikipedia.org/wiki/Profitability_index
http://www.investopedia.com/terms/p/profitability.asp

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GROUP B: SHORT ANSWER QUESTIONS (Answer any five questions) (5X3=15)
1. What is time value of money? (3)

Answer
The time value of money (TVM) is the idea that money available at the present time is worth
more than the same amount in the future due to its potential earning capacity. This core
principle of finance holds that, provided money can earn interest, any amount of money is
worth more the sooner it is received. Money deposited in a savings account earns a certain
interest rate. Rational investors prefer to receive money today rather than the same amount of
money in the future because of money's potential to grow in value over a given period of time.
Money earning an interest rate is said to be compounding in value. The principle of the time
value of money explains why interest is paid or earned, interest, whether it is on a bank
deposit or debt, compensates the depositor or lender for the time value of money. Rational
investors prefer to receive money today rather than the same amount of money in the future
because of money's potential to grow in value over a given period of time. Money earning an
interest rate is said to be compounding in value.
Depending on the exact situation in question, the TVM formula may change slightly. For
example, in the case of annuity or perpetuity payments, the generalized formula has additional
or less factors. But in general, the most fundamental TVM formula takes into account the
following variables:
If FV = Future value of money, PV = Present value of money, i = interest rate, n = number of
compounding periods per year, t = number of years, then the formula for TVM is,
FV = PV x (1 + (i / n)) ^ (n x t) or, FV = PV * (1 + i) n

Source:
http://www.investopedia.com/terms/n/npv.asp
https://en.wikipedia.org/wiki/Net_present_value

2. What do you understand by cost-volume profit analysis? (3)

Answer
Cost-volume profit (CVP) analysis is based upon determining the breakeven point of cost and
volume of goods and can be useful for managers making short-term economic decisions. Cost-
volume profit analysis makes several assumptions in order to be relevant including that the
sales price, fixed costs and variable cost per unit are constant. Running this analysis involves
using several equations using price, cost and other variables and plotting them out on an
economic graph.

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 CVP analysis is a method of cost accounting that is concerned with the impact varying levels of
sales and product costs will have on operating profit. CVP analysis is only reliable if costs are
fixed within a specified production level. All units produced are assumed to be sold and all
costs must be variable or fixed in a CVP analysis. Another assumption is all changes in expenses
occur because of changes in activity level. Semi-variable expenses must be split between
expense classifications using the high-low method, scatter plot or statistical regression.
The cost volume profit analysis, commonly referred to as CVP, is a planning process that
management uses to predict the future volume of activity, costs incurred, sales made, and
profits received. In other words, its a mathematical equation that computes how changes in
costs and sales will affect income in future periods. The CVP analysis classifies all costs as
either fixed or variable. Fixed costs are expenses that dont fluctuate directly with the volume
of units produced. These costs effectively remain constant. An example of a fixed cost is rent. It
doesnt matter how many units the assembly line produces. The rent expense will always be
the same.
Source:
http://www.investopedia.com/terms/c/cost-volume-profit-analysis.asp
https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-ii/cost-
volume-profit-relationships/cost-volume-profit-analysis

3. What do you understand by credit? Mention explain (3)

Answer
Credit (from Latin credit, "(he/she/it) believes") is the trust which allows one party to provide
money or resources to another party where that second party does not reimburse the first
party immediately (thereby generating a debt), but instead promises either to repay or return
those resources (or other materials of equal value) at a later date. In other words, credit is a
method of making reciprocity formal, legally enforceable, and extensible to a large group of
unrelated people.
Credit is a contractual agreement in which a borrower receives something of value now and
agrees to repay the lender at some date in the future, generally with interest. Credit also refers
to an accounting entry that either decreases assets or increases liabilities and equity on the
company's balance sheet. Additionally, on the company's income statement, a debit reduces
net income, while a credit increases net income. Credit also refers to the creditworthiness or
credit history of an individual or company. For example, someone may say, "He has great
credit so he's not worried about the bank rejecting his mortgage application." In other cases,
credit refers to a deduction in the amount one owes.
Source: https://en.wikipedia.org/wiki/Credit_(finance)
http://www.investopedia.com/terms/c/credit.asp

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4. Why linear programming is important in agribusiness firm? (3)

Answer
Linear programming is the process of taking various linear inequalities relating to some
situation, and finding the "best" value obtainable under those conditions. A typical example
would be taking the limitations of materials and labor, and then determining the "best"
production levels for maximal profits under those conditions. Linear programming (LP) (also
called linear optimization) is a method to achieve the best outcome (such as maximum profit
or lowest cost) in a mathematical model whose requirements are represented by linear
relationships. Linear programming is a special case of mathematical programming. It is
functional with following assumptions like; Linearity, Additively, Divisibility, Fitness of activities
and resource restrictions, Non negativity and single value expectation. This implies planning of
activities in a manner that achieves some optimal result with restricted resources, so in
agribusiness firms linear programming can have its crucial importance and few of them have
been listed below;

1. Solve the business problems: With linear programming we can easily solve business
problem like allocation of scare resources. It is much benefited for increasing the profit or
decreasing the cost of business.

2. Easy work of manager under limitations and condition: Linear programming solve problem
under different limitations and conditions, so it is easy for manager to work and make
decision under limitations and conditions

3. Use in solving staffing problems:-With linear programming, we can calculate the number of
staff needed in any business activity.

4. Helpful in profit planning: Today linear programming is using for good profit planning.

5. Select best advertising media: With linear programming we can select best advertising
media among a numbers of media for agribusiness promotions.
Improves the quality of the decisions. A better quality can be obtained with the system
by making use of linear programming.
Linear programming is most suitable for solving complex problems.
Highlights the constraints in the production
Helps in the optimum use of the resources
Provides information on marginal value of products (shadow prices)
Utilized to analyze numerous economic, social, military and industrial problems.

14
 Helps in simplicity and productive management of an organization which gives better
outcomes.
Provides a way to unify results from disparate areas of mechanism design.
More flexible than any other system, a wide range of problems can be solved easily.

6. Some of the real time applications are in production scheduling, production planning and
repair, plant layout, equipment acquisition and replacement, logistic management and
fixation.
7. Linear programming has maintained special structure that can be exploited to gain
computational advantages.
Source:
https://en.wikipedia.org/wiki/Linear_programming
http://www.purplemath.com/modules/linprog.htm

5. How do you use the knowledge of break-even point? (3)

Answer
It may be defined as the level of sales at which the total revenue is equal to total costs and the
net income is zero. It is the point of activity where total revenue and total expenses are equal.
This is also known as No Profit and No Loss zone.

Breakeven Point = Fixed Costs/(Selling Price per unit - Variable Cost per unit).

In economics and business, specifically cost accounting, the break-even point (BEP) is the point
at which cost or expenses and revenue are equal: there is no net loss or gain, and one has
"broken even." A profit or a loss has not been made, although opportunity costs have been
"paid," and capital has received the risk-adjusted, expected return. It is shown graphically as
the point where the total revenue and total cost curves meet. In the linear case the break-even
point is equal to the fixed costs divided by the contribution margin per unit.

The break-even point is the production level where total revenues equals total expenses. In
other words, the break-even point is where a company produces the same amount of
revenues as expenses either during a manufacturing process or an accounting period. Since
revenues equal expenses, the net income for the period will be zero. The company didnt lose
any money during the period, but it also didnt gain any money either. It simply broke even.
Graphically BEP is expressed as,

15
With a breakeven analysis, everybody can determine when their company will generate
enough revenue to cover its expenses and earn a profit. The same holds true for a particular
product or service. The break-even point is achieved when the generated profits match the
total costs accumulated till the date of profit generation. Establishing the break-even point
helps businesses in setting plans for the levels of production which it needs to maintain be
profitable. The accounting method of calculating break-even point does not include cost of
working capital. The financial method of calculating break-even, called value added break-even
analysis is used to assess the feasibility of a project. This method not only accounts for all
costs, it also includes the opportunity costs of the capital required to develop a project. Break-
even analysis is a practical and popular tool for many businesses, including start-ups and its
knowledge can be helpful to farmer or entrepreneur for machining many rational decisions.
The following points highlight the top ten managerial uses of break-even analysis.
1. Safety Margin
2. Target Profit
3. Change in Price
4. Change in Costs
5. Decision on Choice of Technique of Production
6. Make or Buy Decision
7. Plant Expansion Decisions
8. Plant Shut Down Decisions

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 9. Advertising and Promotion Mix Decisions
10. Decision Regarding Addition or Deletion of Product Line.
BEP knowledge can be helpful to farmer or entrepreneur for machining many rational
decisions as it;
Focuses entrepreneur on how long it will take before a start-up reaches
profitability i.e. what output or total sales is required
Helps entrepreneur understand the viability of a business proposition, and also
those who will lend money to, or invest in the business
Margin of safety calculation shows how much a sales forecast can prove over-
optimistic before losses are incurred
Helps entrepreneur understand the level of risk involved in a start-up
Illustrates the importance of a start-up keeping fixed costs down to a minimum
(higher fixed costs = higher break-even output)
Source:
http://www.investopedia.com/terms/b/breakevenpoint.asp
http://www.myaccountingcourse.com/accounting-dictionary/break-even-point
https://en.wikipedia.org/wiki/Break-even_(economics)
http://www.economicsdiscussion.net/break-even-analysis/top-10-managerial-uses-of-
break-even-analysis/21794

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GROUP C: SHORT NOTES (Answer any five questions) (6X5 = 30)

1. Business Accounting vs Economic Accounting (5)

Answer
Economic Accounting
1. Relating to economy based accounts.
2. Determined by economic principles.
3. Includes explicit and opportunity costs
4. Whole of the project timeline view.
5. Used to determine market entry, stay or
exit.
6. Total Revenues - (Explicit Costs + Implicit
Costs) = Economic Profit
7. Accounting Profit - Implicit Costs
= Economic Profit
Business Accounting
1. Relating to the keeping of detailed
accounts relating to a business or
businesses.
2. Determined by Generally Accepted
Accounting Principles.
3. Includes explicit cost only.
4. Single entity accounting period view.
5. Used for income tax and financial
performances.
6. The basic Business Accounting formula is
Total Revenue - Explicit Costs. The detailed
formula is Total Revenue - Cost of Goods
Sold = Gross Profit.

2. Define Credit and explain 3Rs of Credit (5)

Answer
Credit (from Latin credit, "(he/she/it) believes") is the trust which allows one party to provide
money or resources to another party where that second party does not reimburse the first
party immediately (thereby generating a debt), but instead promises either to repay or return
those resources (or other materials of equal value) at a later date. In other words, credit is a
method of making reciprocity formal, legally enforceable, and extensible to a large group of
unrelated people. There are three basic considerations, which must be taken into account
before a lending agency decides to agency decides to advance a loan and the borrower decides
to borrow. These three basic is called 3Rs of credit.

1. Returns from the Proposed Investment

2. Repaying capacity, it will generate
3. The risk bearing ability of the borrower

1. Returns from the investment: This is an important measure in the credit analysis. The
banker needs to have an idea about the extent of returns likely to be obtained from the
proposed investment. The demand for credit can be accepted only when the borrower will

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 be able to generate returns that will enable him to tide over the costs. The main concern
here is that the borrower should be able to generate incremental income when they go for
the additional returns from the borrowed funds.

2. Repayment capacity: This simply means the ability of the borrower to clear off the loan
obtained for production purposes within the time stipulated by the bank. The loan amount
may be productive enough to generate additional income to the borrower, but it may not
be productive enough to repay the loan. Hence, the necessary condition here is that the
loan should not only be profitable but also have potential for effecting repayment. Then
only the borrower has a favorable point on his side.

3. Risk bearing ability: It is the ability of the borrower to withstand the risks that arise due to
financial loss. Risk can be quantified through statistical techniques like coefficient of
variation, standard deviation, programming models etc. Probabilities can be estimated and
ascribed to the measurement of uncertainty phenomenon. The borrower may satisfy the
banker with regard to returns and repayments capacity, but yet another factor to be
fulfilled is risk bearing ability. This is vital because at times our estimates go away and the
expected output may not be forthcoming because of the risks enumerated above may
stand in the way. Consequently our plans turn topsy-turvy.

Source:
http://www.investopedia.com/terms/c/credit.asp
https://en.wikipedia.org/wiki/Credit_(finance)
http://ecoursesonline.iasri.res.in/mod/page/view.php?id=46204
https://www.indiaagronet.com/indiaagronet/bank_credit/CONTENTS/Three%20_R_s.h
tm

3. Financial Indicators (5)

Answer
Financial indicators are statistics extensively used to monitor the soundness, stability and
performance of various sectors of the economy. Their usefulness lies in their ability to provide
insight into the relationships among economic and financial statistics such as debt, assets,
liabilities, net worth, incomes and output, in other words, enhancing the analytical content of
these statistics taken individually. These are the measures of performance that are widely used
by professionals to make forecasts and evaluations. Some of the financial indicators are;

1) Real GDP (Gross Domestic Product): The real GDP is the market value of all goods and
services produced in a nation during a specific time period. Real GDP measures a societys
wealth by indicating how fast profits may grow and the expected return on capital. It is

19
 labeled real because each years data is adjusted to account for changes in year-to-year
prices. The real GDP is a comprehensive way to gauge the health and well-being of an
economy.

2) M2 (Money Supply): M2 money supply represents the aggregate total of all money a
country has in circulation. It takes into account all physical currency such as bills and coins;
demand deposit savings and checking accounts; travelers checks; assets in retail money
market accounts and small money market mutual funds.

3) Consumer Price Index (CPI): The CPI measures changes in the prices paid for goods and
services by urban consumers for the specified month. The CPI is essentially a measure of
individuals cost of living changes and provides a gauge of the inflation rate related to
purchasing those goods and services.

4) Producer Price Index (PPI): The PPI is a group of indexes that measures the changes in the
selling price of goods and services received by producers over a period of time. Think of it as
the business-side equivalent to the CPI that measures changes in prices paid by consumers.
The PPI captures price movements at the wholesale level, before price changes have
bubbled up to the retail level.

5) Consumer Confidence Survey: It is a gauge of the publics confidence about the health of
the country's economy that reflects the publics optimism/pessimism and the nations
mood.

6) Current Employment Statistics (CES): CES provides comprehensive data on national

employment, unemployment and wages and earnings data across all non-agriculture
industries, including all civilian government workers.

7) Retail Trade Sales and Food Services Sales: This data tracks monthly retail and food service
sales, details changes from previous periods, and identifies in which sectors sales increased
and/or decreased.

8) Housing Starts (Formally Known as New Residential Construction): An approximation of

the number of housing units on which some construction was performed during the month.
Data is provided for single-family homes and multiple unit buildings. The data indicates how
many homes were issued building permits, how many housing construction projects were
initiated and how many home construction projects were completed.

9) Manufacturing and Trade Inventories and Sales: This data represents the combined value
of trade sales and shipments by manufacturers in a specific month, as well as the combined

20
 values of inventories in the wholesale and retail business sectors and manufacturing. The
current and most recent past months inventory/sales ratios are also provided.

10) S&P 500 Stocks Index (the S&P 500): The Standard & Poors 500 is a market-value-
weighted index of 500 publicly owned stocks that are combined into one equity basket. This
basket of stocks has become the industry standard and benchmark for the overall
performance of the equity markets.

Source:
http://www.rbcpa.com/economic_fundamentals.pdf
http://www.financejournal.ro/fisiere/revista/1229512994013-22.pdf
https://www.suu.edu/ad/finance/pdf/financial-indicators-2012.pdf
http://www.statcan.gc.ca/pub/13-605-x/2012004/article/11730-eng.htm

4. Loan repayment plan (5)

Answer
Repayment is the act of paying back money previously borrowed from a lender. It is refers to
the payments on a debt. Repayment usually takes the form of periodic payments that normally
include part principal plus interest in each payment. Failure to keep up with repayments of
debt can force a person to declare bankruptcy and severely affect his credit rating. Borrowers
should explore every alternative, such as earning additional income, refinancing and
negotiating with creditors before declaring bankruptcy. There are multiple options for a
borrower who is unable to repay loans according to a contract. Payment must cover both
principal and the incurred interest. Three important loan repayment plans are;

Non amortized loan: Non amortized plan includes regularly scheduled payments of
interest during loan term and principal at the end of the term.
Amortized loan: Amortized is termed as killing by degrees which can be interpreted
as repaying of principal by series of installment
Partially amortized loan: Partially amortized plan is referred as small principal
payments each year during repayment period with a bulk of unpaid balance at the end
of the term. It is also called balloon payment.

Under the terms of a loan, repayment can have different schedules and requirements. For
example, a loan may be amortized over a specific period of time, requiring regular repayments.
The repayments would be divided between the interest (i.e. the interest on the outstanding
loan amount) and the principal repayment (i.e. the remaining amount of the periodic payment
that is used to reduce the outstanding loan amount). At the same time, a loan term may be
amortized over a longer period of time than the due date on the loan. In this case, a loan will

21
require a "balloon repayment" (i.e. the amount of principal not yet repaid will be due in full at
the end of the term). In either case, all payments on the loan are called repayments. For both a
borrower and a lender, the breakdown of repayments into principal and interest are very
important. For a business, the interest portion of the repayment on a business loan is tax
deductible. The principal is not. For a lender, the interest portion of the repayment is treated
as income. The principal is not.

Loan repayment plans is a plan for paying any outstanding debts. Different types of financing
involve payment plans including mortgage loans, vehicle loans, and student loans. Within a
payment plan, the borrower agrees to pay back a certain amount of money each month to
repay the debt. Other types of payment plans, such as credit cards, will require a more flexible
payment plan, with different amounts due each month. Prepayments may also be part of a
payment plan where customers prepay for merchandise on a specified plan before actually
receiving the merchandise. Few commonly used repayment plans are;

a. Lump sum repayment plan: Here principle is paid when loan matures while interest is paid
at the end of each year.
b. Amortized repayment plan: It is of two type; amortized decreasing repayment plan and
amortized even repayment plan.
c. Variable repayment plan: It is also known as quasi variable repayment pan where various
levels of installments are paid by the borrowers over the loan period.
d. Optional repayment plan: Regular interest is paid but the borrower is provided with option
to make desirable payment.
e. Future repayment plan: In this method borrowers make advance payment of loan as
assurance for repayment of debt.
f. Balloon repayment plan: It is also known as partial repayment plan where installment
amount increases over the year passes and large amount is paid at the final year.

Source:
http://www.investopedia.com/terms/r/repayment.asp
http://www.businessdictionary.com/definition/payment-plan.html
http://www.nelnetloanservicing.com/wp-
content/uploads/1320_Update_Loan_Repay_Plan_PDF_BW_0506.pdf
https://www.eou.edu/fao/files/2011/08/USEDLoanrepayment.pdf

22
5. With the help of data you have (may be hypothetical), prepare cash flow statement, balance
sheet and profit and loss statement of an agribusiness firm (5)
Answer
The net-worth statement is known as balance sheet. It shows the value of assets that would
remain if the farm business were liquidated (turned into cash value) and all the outside claims
were paid.

Mathematically, Net-worth = Assets Liabilities

Example:

The following are the hypothetical information obtained as of Ashad 31, 2073 fom a Farm A
of Bhaktapur district. Please prepare balance sheet and net-worth statement.

Business started with Rs. 5,00,000.00

Cash in hand Rs. 10,000.00
Cash in bank Rs. 20,000.00
Debts receivable: Rs. 5,000.00
Maize in stock: Rs. 6,000.00
Wheat in stock: Rs. 5,000.00
Rice in stock: Rs. 10,000.00
Livestock with the value of: Rs. 50,000.00
Thresher with the value of: Rs. 15,000.00
Land with the value of: Rs. 2,00,000.00
Buildings with the value of: Rs. 3,00,000.00
Loan from Farmer Group Fund: Rs. 10,000.00
Loan from Cooperatives for rice cultivation Rs. 15,000.00
Loan from Agri. Dev. Bank, for thresher purchase Rs. 20,000.00

Balance sheet of Farm A as of 31 Ashadh, 2073

Assets Liabilities
Particular Amount (Rs.) Particular Amount (Rs.)
Loan from Farmers Group
Cash in hand 10,000.00 10,000.00
Fund
Cash in bank 20,000.00 Loan from Cooperatives 15,000.00
Debts receivable 5,000.00 Loan from Agri. Dev. Bank 20,000.00
Maize in stock 6,000.00 Owners' equity 5,00,000.00
Wheat in stock 5,000.00

23
 Assets Liabilities
Rice in stock 10,000.00
Livestock 50,000.00
Thresher 15,000.00
Land 2,00,000.00
Buildings 3,00,000.00 Net-worth 76,000.00
Total 6,21,000.00 Total 6,21,000.00
Cash flows out of the farm
1. Operating expenses like seeds, feed, hired labour etc.
2. Capital expenses like breeding livestock, machineries and equipment etc.
3. Other expenses like taxes, rent, family living expenses.
4. Debt services like payment of principal, interests, penalties etc.
Constructing a Cash Flow Budget:
1. Develop a whole farm plan.
2. Estimate inputs needed for crop and livestock production
3. Estimate crop and livestock production
4. Estimate their sales cash receipt.
5. Estimate other cash incomes
6. Estimate cash farm operating expenses.
7. Estimate non-farm cash expenses.
8. Estimate purchase and sales of capital assets.
9. Find and record the scheduled principal and interest payments on existing debt.
Example:
A farmer wants to introduce goat farming in his farm, where he was growing only cereals and
vegetables. A cash flow for the farm, for the duration of one year, is as under.

S.N. Particular Without project With project

1 Cash Inflow
Maize sales 500 400
Millet sales 300 300
Wheat sales 400 300
Vegetable sales 600 500
Goat sales 4000
Off farm income 1000 500
Total cash inflow 2800 6000

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 S.N. Particular Without project With project
2 Cash outflow
Seeds, fertilizers, pesticides etc. 1000 800
Purchase of kids 2000
Purchase of feed, fodder 200
Purchase of construction materials 500
Total cash outflow 1000 3500
3 Net Cash flow 1800 2500
By observing above cash flow budget of a farmer for that particular year, his financial situation
is worthwhile in going to the goat project. But, remember that, true picture will come when he
analyzes for the whole project period (may be 5 or 6 years).
Source:
http://download.nos.org/srsec320newE/320EL30.pdf
https://www.zionsbank.com/pdfs/biz_resources_book-4.pdf

6. Why and how do you calculate return on investment? (5)

Answer
Return on investment (ROI) is a measure that investigates the amount of additional profits
produced due to a certain investment. Businesses use this calculation to compare different
scenarios for investments to see which would produce the greatest profit and benefit for the
company. However, this calculation can also be used to analyze the best scenario for other
forms of investment.

It is a performance measure used to evaluate the efficiency of an investment or to compare

the efficiency of a number of different investments. ROI measures the amount of return on an
investment relative to the investments cost. In business, the purpose of the "return on
investment" (ROI) metric is to measure, per period, rates of return on money invested in an
economic entity in order to decide whether or not to undertake an investment. It is also used
as indicator to compare different project investments within a project portfolio. The project
with best ROI is prioritized. ROI and related metrics provide a snapshot of profitability,
adjusted for the size of the investment assets tied up in the enterprise. Marketing decisions
have obvious potential connection to the numerator of ROI (profits), but these same decisions
often influence assets usage and capital requirements (for example, receivables and
inventories). Marketers should understand the position of their company and the returns
expected. Return on investment may be calculated in terms other than financial gain. For
example, social return on investment (SROI) is a principles-based method for measuring extra-
financial value (i.e., environmental and social value not currently reflected in conventional
financial accounts) relative to resources invested. It can be used by any entity to evaluate

25
impact on stakeholders, identify ways to improve performance, and enhance the performance
of investments. It can be calculated as; for a single-period review, divide the return (net profit)
by the resources that were committed (investment);

Return on investment = Net income / Investment

Where, Net income = gross profit expenses.

Investment = stock +market outstanding + claims.

Source:
https://journals.tdl.org/llm/index.php/llm/article/viewFile/1861/1623
http://jwilson.coe.uga.edu/EMAT6450/Class%20Projects/Major/Teacher%27s%20Guid
e%20ROI.pdf

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