Risk Premia in Tractor and Combine Investments [report]

Mumey, Glen; Unterschultz, Jim
A farmer planning to use Net Present Value (NPV) analysis on machinery requires estimates of operating benefits over time, an estimate of terminal or salvage values and a risk-adjusted discount rate. Using financial market information and related Root Mean Square Errors on machinery value forecasts, risk premia for combine and tractor investments are estimated for non-diversified investors. These risk premia can be added to the risk free rate in comparable maturity long term bonds to derive an
more » ... bonds to derive an appropriate discount rate for NPV analysis. Where machines are held as single-asset portfolios, risk premia identified for discounting terminal value vary between 5.5% and 8.3% for combines and between 2.4% and 3.6% for tractors, depending on age during the holding period. Where machines are held as parts of multi-asset portfolios, risk premia are usually lower, depending on machinery's weight in the multi-asset portfolio and its covariance with the rest of the portfolio.
doi:10.7939/r3xw47x54 fatcat:q3grzilqynfevbzqegdndjyfny