A polyperiod production-investment model of growth of large-size livestock farms in Southwest Virginia

Abstract

A polyperiod model was developed for investigating production investment decisions associated with firm growth. A fifteen year planning horizon divided into three production periods was used. Initial resources were those of a large-size livestock farm (410 acres of open land) located in Southwest Virginia. The model maximizes the present value of net returns. A twelve percent discount rate was used to obtain a basic solution. The effect of varying the discount rates or maximizing net worth at the end of the planning period were analyzed. Growth was measured in terms of net returns and net worth at the end of the planning period. Family consumption affected capital accumulation by the withdrawal of fixed amounts of capital per period from returns generated during the period. The effect in the amount of initial debt was studied. Growth was associated with changes in enterprise organization, added investments and finance policies. A high discount rate and a high initial debt were the variables that most affected growth. When land purchases were restricted growth was reduced considerably. The dry-lot steer enterprise was more profitable and had a greater potential for expansion than the beef cow enterprise. A major proportion of investments were financed with capital generated within the firm. The greatest amount of investments were done during the last production period. This stresses the importance of time in the capital accumulation process for the growth of the firm.