ITY

ZA M

ES
B
IA
N O PE N U NI V

ZAMBIA OPEN UNIVERSITY

SCHOOL OF AGRICULTURAL SCIENCES
SEMESTER TWO FINAL EXAMINATION
COURSE: PRINCIPLES OF FARM MANAGEMENT
COURSE CODE: ABM 311
DATE: JUNE 2024
EXAMINER: DR. LINDSAY TRAPNELL

Instructions to Candidates:
1. The candidates must ensure that their names and student number are
written on cover page for the exam.
2. There are FIVE (5) questions. Each question carries 20 marks.
3. There shall be no form of communication between students during the
examination. Any students caught doing this will be disqualified.
Question 1.
In carrying out analyses in farm management, it is important to carry out whole farm analyses
for individual unique farms instead of using average values.
Do you agree? (1 Mark).
Describe why farming systems and values in the analysis are unique to individual farming
businesses. (9 Marks).
List and describe the factors that are involved in decision making for farming businesses (7
Marks).
Over which of the factors do farmers have control? (3 Marks).
Question 2.
In their book, ‘The Farming Game’, Malcolm, Makeham and Wright (2005) make the
statement that ‘Economics is the core discipline of farm management analyses’.
Discuss the basis of why they made that statement. (20 Marks).
Question 3.
Farming is a risky business.
Describe issues about the different risks that may occur in farming businesses. (5 Marks).
Describe ways in which managers of farms can minimise the harmful effects of risk occurring
in their businesses. (3 Marks).
Boehlje and Eidman (1984), in their book ‘Farm Management’, described a way that farmers
could deal with uncertain variables in budgets by calculating expected values based on the
probability of their occurrence. The method used is to calculate the expected value of their
occurrence.
State the equation used to calculate expected values for uncertain variables. (2 Marks).
Say that a farmer wants to calculate the expected value for a crop of maize based on the yield
for various types of season that could occur over a period of 10 years.
The farmer estimates that for the best season for 1 year in 10, the crop could yield 6.0 tonnes
per hectare, for a good year of 3 years in 10 the crop could yield 5.5 tonnes per hectare, for
the most likely season of 4 years in 10 the yield could be 5.0 tonnes per hectare, in a poor
season of 1 year in 10, the yield could be 2.0 tonnes per hectare but in the worst season the
yield could be only 0.5 tonnes per hectare.
Calculate the overall expected value for the yield of the crop of maize. (10 Marks).
Question 4. (20 Marks).
A farm family grows crops in the Kabwe district of Zambia for the rotation shown in the
following table:
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 4,000 2,500 4,500 1,200
Variable costs K 5,980 4,250 4,280 5,260

Calculate the total income per hectare for the various crops.
Calculate the total variable costs for the various crops.
The amount of interest received was estimated to be K 200,000
Overhead or fixed cost were estimate as follows:
Owner operator’s labour and management K 1,750,000
Administrative costs K 1,000,000
Depreciation of assets K 150,000
Interest on loans was estimated at K 337,000
The amount of tax was estimated at 30% of the estimated Net Profit.
Calculate the estimated operating profit, net profit and increase in owner’s equity for the farm
business over the year.
You need to check that the increase in equity calculated above is the same as that which is
calculated from balance sheets for the farm business.
Assets at the beginning of the year include value of the land being K 9,500,000, depreciable
assets of K 1,500,00 and cash of K 175,000.
Liabilities at the start of the year are a bank loan of K 2,250,000.
Prepare a balance sheet at the start of the year.
Calculate equity as a percentage of total assets at the beginning of the year.
Depreciation is at the rate of 10% of the value of assets at the beginning of the year.
Repayment of loan is at 10% of the value of the loan at the beginning of the year.
Calculate estimated net cash flow during the year.
Calculate cash on hand at the end of the year.
Prepare a balance sheet for the farm at the end of the year.
Calculate estimated increase in equity over the year. (Should be the same as that calculated
previously).
At the end of the year, calculate the value of equity as a percentage of total assets.
Calculate the percentage efficiency of the farm over the year.
Calculate the gearing ratio of the farm at the end of the year.
Comment on the expected health of the farm business for the year.
(Total of 20 Marks).
Question 5.
What is the difference between real values and interest rates versus nominal values and
interest rates? (2 Marks).
Write the equation for converting real interest rates to nominal interest rates. (2 Marks)
Why is it normal to carry out economic analyses for farm investments using nominal rates for
monetary values and interest rates. (2 Marks).
A family that run a cropping farm wish to expand their business.
A neighbour offers them an area of 200 hectares.
The amount of rent per annum for 5 years is K 6,500 per hectare.
The family decide to do a discounted cash flow analysis (benefit:cost analysis) to determine
whether or not to accept the offer.
The discount rate that they require for the rental over 5 years is 20 per cent per annum.
At the beginning of the first year they will need to invest an extra K 850,000 for cropping
machinery.
They expect that at the end of 5 years the salvage value of the machinery will be K 350,000.
The rotation that they will use together with yield per hectare for 200 hectares per year with
estimated income per kilogram and variable costs per year is shown in the following table.

Item Year
1 2 3 4 5
Crop Soyabeans Maize Sunflower Maize Casava
Area Hectares 200 200 200 200 200
Yield T/ha 3.0 5.0 2.5 5.0 10.5
Price/tonne K 4,200 2,500 4,700 2.500 1,200
Variable cost / ha. K 4,980 4,250 4,280 4,250 5,280

The layout for the calculations is shown in the power point presentation.
Note that increases in productivity for total extra income are equivalent to 13% per annum.
The inflation rate for total extra cost per annum is 13%, too.
Calculate the Net Present Value (NPV) for the required discount rate of 20% per annum for
the investment period of 5 years.
Calculate the Internal Rate of Return as well.
Will the family decide to take up the rental for 5 years? (14 Marks).

END OF EXAM