On 12 February 2026, a dealer in Grand Island, Nebraska, shows a corn farmer two grain dryers (an example, with invented figures). The used dryer costs $120,000, the new one $200,000, and the dealer says each earns its price back in 2.5 years. Measured by what is left after the money pays the farmer’s own rate of 10% a year, the used dryer loses $631 and the new one adds $226,794. Choosing by the dealer’s date alone hides a $227,425 gap. Compare purchases by that remainder, called net present value, and check that the cash fits the loan. The one-page sheet at the end does both.
The dealer’s date is the payback: the time until the cash a purchase brings in adds up to its price. The dealer works it out on an envelope, price divided by what the machine saves in a year. Nobody is lying, and the date is worth knowing. What happens after it never enters the sum, and the whole gap between these two dryers comes from there.
If both dryers pay back in 2.5 years, why do they end so far apart?
The payback stops counting on the day the running cash returns to zero, and that day is rarely the end of the machine’s life. The used dryer saves $48,000 a year for 3 years, $144,000 against a $120,000 price. The new dryer saves $80,000 a year for 8 years, $640,000 against $200,000. Both reach their price at 2.5 years. After that date the used dryer has half a year left and the new one has five and a half.
Money that arrives later is worth less than money in hand, because the farmer could use it sooner. Aswath Damodaran, a finance professor at New York University, publishes his course material openly. He writes that cash flows across time cannot be added up. They have to be brought to the same point in time before aggregation. A simple payback adds them anyway, which is why it is easy to do in your head.
To bring each year’s cash to today’s money, cut it by the farmer’s rate, here 10% a year: the $48,000 saved in year 2 counts as $39,669 today. Add the cut amounts, take off the price, and what is left is the net present value (NPV).
| Used dryer | New dryer | |
|---|---|---|
| Price | $120,000 | $200,000 |
| Saving per year | $48,000 | $80,000 |
| Years of use | 3 | 8 |
| Payback | 2.5 years | 2.5 years |
| Net present value at 10% a year | a loss of $631 | $226,794 |
Graham and Harvey surveyed 392 chief financial officers of companies in the United States and Canada. They sum up the case against payback in one line: Payback ignores the time value of money and cash flows beyond the cutoff date; the cutoff is usually arbitrary. The cutoff is the longest payback the buyer will accept. Those are corporations, not farms, so the survey shows what finance professionals think of the method, not what a farm should do. You can rebuild both dryers in the payback, net present value (NPV) and internal rate of return (IRR) calculator.
Which rate do you use, and can it change the answer?
The rate is the lowest yearly return you accept from this money, and it can turn a yes into a no without touching the machine. At 9% a year the used dryer adds $1,502. At 10% it loses $631, and at 12% it loses $4,712. The savings are the same in every row; only the rate changed.
| Rate per year | Net present value |
|---|---|
| 8% | adds $3,701 |
| 9% | adds $1,502 |
| 10% | a loss of $631 |
| 12% | a loss of $4,712 |
| 14% | a loss of $8,562 |
The rate where the answer turns is 9.7% a year. It has a name, the internal rate of return (IRR), which Damodaran defines as the discount rate that sets the net present value equal to zero. It is this table read backwards.
No table gives you the rate, so write it with its origin. Use the higher of two figures. One is the full yearly cost of the loan that would pay for the purchase, fees included. The other is what the money earns where it sits today. In the example the dealer’s loan costs 9% a year and the savings account pays 4%, so the base is 9%.
Then add a premium if the project is riskier than the farm’s ordinary work. Damodaran states the principle: The hurdle rate should be higher for riskier projects. The dryer’s saving depends on how wet the corn comes in and on the elevator’s drying charge, so the farmer adds 1 point, writes 10% and dates it.
A written rate can be set above the minimum. Bravo Motiño, in a thesis on an organic cacao farm in Honduras, put the owners’ opportunity cost at 12.57% and discounted at 15% anyway, to be stricter and more conservative.
One check catches a common mistake. Damodaran writes that if the cash flows are nominal (real), the discount rate has to be nominal (real). Nominal means with price rises included, and real means in today’s money. A bank rate that already carries inflation, applied to savings written without it, makes you reject good purchases while every step looks right.
What cash do you count, and what do you keep about the option you ruled out?
If the farmer picks the new dryer, the quote lists $200,000. It leaves out the concrete pad, the gas line and the wiring, which an installer prices at $30,000 in this example. With them the money out on day one is $230,000, the payback moves from 2.5 to 2.9 years, and the net present value falls from $226,794 to $196,794.
Count the cash that changes because of the decision, and all of it. Damodaran: Use cash flows rather than earnings. You cannot spend earnings. Depreciation is not cash that leaves, and the farm’s whole result is not the flow either, because part of it would have happened without the dryer.
Money tied up while the machine works belongs on the list as well. Inputs bought ahead, animals being raised and grain waiting for a price leave at the start and come back at the end. For the dryer it is the propane stored before harvest. Damodaran warns that the failure to consider working capital in a capital budgeting project will overstate cash flows on that project and make it look more attractive than it really is.
Beside each year’s saving, write who it depends on. Here the saving is the drying charge the elevator stops billing, so it depends on the elevator’s price list. A saving 10% lower, from a lower charge or a dry fall, takes the net present value from $196,794 to $154,115 and the payback to 3.2 years. A good result that rests on a single buyer is only as good as that buyer. The authors of an Embrapa study of a goat milk system in north-eastern Brazil call their good results worrying. They depend on a purchase guarantee and subsidized prices from a federal milk program.
Give the option you turned down one line. Nobody pays an invoice for what the farm decided not to do, so the figure that ruled it out is lost unless someone writes it on the day. Write three things.
- The figure that ruled it out, with its unit: here, the cents per bushel the elevator charges against the farm’s own cost of drying.
- Where that figure came from: a contract, a written quote or the name of whoever said it. Say so when it came from the party selling the machine.
- How far it was from flipping: how much the price or the cost must move for the decision to reverse.
A written investment plan keeps the condition of a purchase before the money goes out. This line keeps what ruled an option out.
Will the cash cover the loan and the credit line?
Value and cash are two separate questions. The new dryer passes on value, with a net present value of $196,794. On cash, first find the lowest point of the running cash, which is day one with $230,000 out. The farm’s credit line is $260,000, so the amount fits.
Then compare the time the money takes to come back with the loan term. The discounted payback is the time until the savings, each cut to today’s money at your rate, add up to the price. For the new dryer it is 3.6 years. The dealer’s loan for the full $230,000 runs 3 years at 9% a year, which costs $90,863 a year against $80,000 saved. The last installment falls due before the money is back, and some other activity pays it.
The same payback can be comfortable or dangerous, depending on the loan beside it. In the Embrapa goat milk study, recovering the extra investment takes 7.3 years. The authors assume a ten-year loan at zero charges whose yearly repayment takes 51.8% of the net margin, which they call comfortable for the farmer and accepted by the lending banks. The same 7.3 years inside a five-year loan is the same investment on a farm in trouble.
Reading value and cash together gives four answers.
- Value yes, cash yes: sign.
- Value yes, cash no: the purchase is sound and the financing is wrong. Ask for a longer term, not a lower price. In the example a 5-year loan costs $59,131 a year, which the savings cover.
- Value no, cash yes: the money comes back fast only because the machine does not last. Sign only if the money buys something other than a return, such as a legal requirement, and write that reason on the sheet.
- Value no, cash no: drop it.
When two purchases compete for one credit line, the larger net present value can mislead. Damodaran divides each net present value by the initial investment. In his example a $1,000,000 project worth $467,937 scores 46.79%. A $10,000,000 project worth $1,358,664 scores 13.59%. The smaller project wins. The percentage rate of return cannot rank them either, since the NPV is a dollar surplus value, whereas the IRR is a percentage measure of return. If you do not yet know how much debt the farm can carry, start with whether your farm debt fits what it earns.
What do you write first, and how long does it take?
Write the rate first, before you read any quote. The rest takes about two hours with the quotes, the loan terms and last year’s actual figures at hand.
The blank line is the only part of the sheet that anyone can check later. The rate was a choice and the horizon was a judgment, and no net present value will appear on a bank statement. The first year’s actual cash against your forecast will.
Renting or buying land runs the same arithmetic on the biggest purchase most farms make, and has its own article: rent the land or buy it. The farm management page covers running the whole farm as a business.