Assignment 2 For ABM 311 Principles of Farm Management

Assignment 2 for ABM 311 Principles of Farm Management.
Refer to the power point presentation.

Lecturer: Dr. L.N.Trapnell.
Question 4.
The Banda family operate a cropping farm business in the Central Region of Zambia.
The area of the farm has an estimated value of K 18,000,000.
Details for the rotation are shown in table 1.
Table 1.
Crop Soy beans Maize Sunflower Cassava
Hectares 160 320 160 160
Yield/ha tonnes 3.0 4.5 2.5 10.5
Price/tonne K 4,250 3,750 4,600 1,200
Variable costs/ha. K 6,500 6,000 5,500 6,200
You have been employed as a Farm Management Consultant to carry out an economic
analysis of their farm business.
The analyses are conducted at the beginning of year.
From table 1, calculate the expected gross income and total variable costs for the farm
Calculating gross income

Soyabeans Maize Sunflower Cassava
160*3=480 320*4.5=1,440 160*2.5= 400 160* 10.5
= 480*4250 = 1,440* 3,750 = 400* 4,600 = 1,680* 1,200
= 2,040, 000 = 5,400,000 = 1,840,000 = 2,016,000
Total Gross Income

2,040,000 + 5,400,000 + 1,840,000 + 2,016,000
= 11,296,000
Calculating variable cost

business.
Apart from gross income from cropping, they also have an income of K 20,000.
The fixed costs for the farming business are:
Owner operator’s allowance K 1,200,000
Administrative costs K 475,000
Depreciation of depreciable assets K 170,000
Interest paid on a bank loan of K 2,500,000 is K 250,000.
Question 1.
Calculate the expected Operating Profit, Net Profit and Increase in Equity for the business
over the year of production.
In calculating the expected Increase in Equity, you will need to deduct an estimated K
526,680 paid in taxation from the Net Profit.
(5 Marks.)
1. Soybeans: 160 hectares * 3.0 tonnes/ha * K4,250/tonne

2. Maize: 320 hectares * 4.5 tonnes/
ha * K3,750/tonne 3. Sunflower: 160 hectares * 2.5 tonnes/ha * K4,600/
tonne
4. Cassava: 160 hectares * 10.5 tonnes/ha * K1,200/tonne
Total gross income: = (160 * 3.0 * 4,250) + (320 * 4.5 * 3,750) + (160 * 2.5 *
4,600) + (160 * 10.5 * 1,200) = (1,360,000) + (5,400,000) + (1,840,000) +
(2,016,000) = K10,616,000
Total variable costs: = (160 * 6,500) + (320 * 6,000) + (160 * 5,500) + (160 *
6,200) = (1,040,000) + (1,920,000) + (880,000) + (992,000) = K4,832,000
Now, let's calculate the operating profit, net profit, and increase in equity.
Operating Profit: = Gross Income - Total Variable Costs = K10,616,000 -

K4,832,000 = K5,784,000
Net Profit: = Operating Profit - Fixed Costs - Interest Paid = K5,784,000 -
(K1,200,000 + K475,000 + K170,000) - K250,000 = K5,784,000 - K1,845,000 -
K250,000 = K3,689,000
Increase in Equity: = Net Profit - Taxation = K3,689,000 - K526,680 =

K3,162,320
So, the expected operating profit is K5,784,000, the net profit is K3,689,000,
and the increase in equity is K3,162,320.
Question 2.
As a check, you will now have to calculate the increase in equity based on the difference in
equity between the opening balance sheet and the expected closing balance sheet.
Construct the balance sheet according to those that appear in the power point slide.
First, construct a balance sheet for the start of the year’s production.
Assets include a land value of K 18,000,000.
Depreciable assets have a value of K 1,700,000.
Cash on hand is K 2,500,000.
The only liability is a bank loan of K 2,500,000
Carry out a calculation of Net Cash Flow for the business.

Ignore depreciation because it is not a cash expense. It is only an allowance.
One of the cash costs will be an amount of K 250,000 that reduces the value of the opening
liability of K 2,500,000.
Having calculated the expected net cash flow for the year, add the value of the opening cash
of K 2,500,000 to obtain the closing amount of cash for the farm business at the end of the
year.
Construct an expected closing balance sheet for the business.
The land value will be the same as that which is shown in the opening balance sheet.
Check to make sure that the increase in equity obtained by subtracting the difference between
the closing equity from the equity at the start of the year is the same as that calculated in
question 1.
Remember when entering the closing value of the balance sheet, you will need to reduce the
value of depreciable assets by K 250,000.
The liability of the bank loan of K 2,500,000 will be reduced by K 250,000 to K 2,225,000
Next, calculate the closing equity percentage. That is the amount of the closing equity divided
by the total value of the assets in the business.
Also, calculate the efficiency percentage and the gearing ratio for the business.
Finally, write a brief account about the expected health of the Haazele’s farming business.
(5 Marks).
Answers for question 2
Balance Sheet at Start of Year

Assets K000 Liabilities K000
Land 18,000 Bank Loan 2500
Cash on Hand 2,500
Depreciable Assets 1,700 Equity 19,700
22,200 22,200
Calculating net cash flow
Having the opening balance payment of liability which is k250,000
Net cash flow =Net cash inflow- Cash outflow
Net cash = k250,000 payments from liability
Therefore we need to Calculate the closing cash

Closing cash = opening cash + Net cash flow closing Cash
=2500,000 + 250,000
Closing Cash = 2,750,000
Balance sheet at end of year
Assets K000 Liabilities K000

Land 18,000 Bank Loan 2500
Cash on Hand 2,750 (250)
Depreciable Assets 1700 2,250
(250)
Depreciable assets 1450
Equity 19,950
22,200 22,200
Calculating Equity
Formular for equity
Equity= Assets- Liabilities
= (18,000,000 + 1,450,000 +2,750,000) – K, 2,250,000
= 22,200,000 – 2,250,000
= 19,950
CALCULATING CLOSING EQUITY PERCENTAGE
Closing Equity Percentage= Closing Equity
Total Assets
19,950 x 100
22,200
=89.86%
EFFICIENCY PERCENTAGE : The efficiency percentage cannot be calculated because

there is no additional information that is net income and Revenue.
GEARING RATIO:
Gearing Ration = liabilities/Equity
= K2,250,000 *100
K19,950
Gearing ratio = 11.28%
Basing on the information. The farming business has a stable financial position. The closing
equity pecerntage of 89.86 indicates a significant portion of the assets financed through
equity rather than debt which indicates a healthy financial structure and in addition the
gearing ration which is around 11.28% indicates a moderate level of leverage which would
potentially provide opportunities for growth without excessively increasing financial risk.
Wiythout information on revenue and expenses its challenging to assess the overall
profitability and efficiency of the business.
Question 5.
In quoting figures for currency values and interest rates, economists use both real and
nominal values.
Real values and nominal values are terms commonly used in economics to
differentiate between values that are adjusted for inflation (real values) and
values that are not adjusted for inflation (nominal values). Real interest rate
takes into consideration inflation proving a more accurate measurement of
a borrower’s purchasing power after the loan has been paid off. For
example if inflation was at 5% between 2021 and 2022 the real increase in
income might be less than the nominal increase of K50,000 when adjusted
for inflation.
While nominal interest rate which is also known as the coupon rate
represents the direct cost borrower incur from the lender without
considering additional economic influences. Nominal interest rate do not
account for changes in purchasing power due to inflation
For example if a farmer earned k100, 000 in 2021 and k150, 000 in 2022, the
nominal increase is k50, 000
What is the equation for obtaining nominal rates from real rates?
(1+i) =(1+r) (1+π) or one can use the old formula which is (i= r+π )
Where I = Annual interest rate

R = nominal rate
Π = Inflation rate
In carrying out economic analyses in farm business management, would you use real or
nominal values? Why would you use those values? (5 Marks
It is crucial to consider both real and nominal values depending on the

context of the analysis
Real values are often preferred when analyzing long-term trends, making
comparisons over time, or assessing the true economic performance of the
farm. Real values help in understanding changes in purchasing power and
the actual profitability of the business
Nominal values are useful for short-term planning, budgeting, and

contractual agreements where prices and incomes are stated in current
terms without adjusting for inflation. Nominal values reflect the actual
amounts of money exchanged in transactions.
real values are often seen as more important than nominal values.
This is because they allow for a more accurate comparison of the
prices of goods and services between past and current values.
Nominal values have their place in the economy as they relate to
the current price of a good.

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Assignment 2 for ABM 311 Principles of Farm Management.

Refer to the power point presentation.

Hectares 160 320 160 160

Yield/ha tonnes 3.0 4.5 2.5 10.5

Price/tonne K 4,250 3,750 4,600 1,200

Variable costs/ha. K 6,500 6,000 5,500 6,200

Calculating gross income

Total Gross Income

Calculating variable cost

1. Soybeans: 160 hectares * 3.0 tonnes/ha * K4,250/tonne

4. Cassava: 160 hectares * 10.5 tonnes/ha * K1,200/tonne

Operating Profit: = Gross Income - Total Variable Costs = K10,616,000 -

Increase in Equity: = Net Profit - Taxation = K3,689,000 - K526,680 =

Carry out a calculation of Net Cash Flow for the business.

Answers for question 2

Balance Sheet at Start of Year

Therefore we need to Calculate the closing cash

Balance sheet at end of year

Assets K000 Liabilities K000

EFFICIENCY PERCENTAGE : The efficiency percentage cannot be calculated because

Where I = Annual interest rate

It is crucial to consider both real and nominal values depending on the

Nominal values are useful for short-term planning, budgeting, and

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