An evaluation of terminal value calculations and their impact to the internal rate of return of a Sacramento Valley almond investment

Abstract

Agricultural investments are becoming a more desirable investment as a means of diversification among investors and their respective clients. Agriculture offers diversification and security, as the underlying asset, the land, continues to appreciate, while potentially growing a profitable crop. California, Florida, Georgia, Arizona, Washington and Oregon are experiencing growing interest in farmland investments from pension funds and other money to diversify their current investment portfolios and capitalize on potential profits found in permanent crop farming. This thesis evaluates a 2021 acquisition of a large almond ranch located in the Sacramento Valley and considers various methods of terminal value calculation to determine if the method used is acceptable and if any one method is superior to the other. The methods being evaluated are:

Modified Liquidation Valuation Capitalization Rate Multiplier Approach These methods rely on future projections of net operating income. When comparing these methodologies to the base evaluation, it was determined that the base model is potentially overly conservative and could mislead investors to not invest in an otherwise reasonable opportunity. Of the methodologies evaluated, the modified liquidation valuation and capitalization rate evaluation are supported by historic data and provide terminal values, resulting in an internal rate of return above 9%. The multiplier approach is the more simplistic of the methods, is reliant upon the performance of other similar business within the same sector, and generates an internal rate of return of above 8%. Many investors would consider this to be an acceptable return to their portfolios, however, on the lower end of acceptability.