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W11569

GOATS: THE GREEN ALTERNATIVE (B)

Professors David M. Currie and Kyle S. Meyer wrote this case solely to provide material for class discussion. The authors do not
intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names
and other identifying information to protect confidentiality.

Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written
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or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University
of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca.

Copyright © 2011, Richard Ivey School of Business Foundation Version: 2011-12-13

INTRODUCTION

Jaden McCoy operated a dairy goat farm in Soddy-Daisy, Tennessee, and was considering expanding the
rental of his goats for land clearing. In early 2011, McCoy successfully bid on a job to clear a section of
property at a nearby resort. McCoy’s goats performed as expected and he earned a small profit in the
process. The resort manager was quite happy because the difficult-to-reach areas of the property were
cleared on time and on budget at a cost well below what he would have paid for a crew of humans. As a
result, the owner asked McCoy if he would be interested in renting his goats to clear other sections of the
resort property.

McCoy went back to his farm and summarized the revenues and expenses for the resort job, which
generated a modest profit of US$120.70 for the seven days the goats were on the job (Exhibit 1). While
the profits from this job were not very large, McCoy was intrigued by the opportunity to develop this line
of business to complement his profits from goat dairy farming.

Soddy-Daisy was located in the foothills of the Smoky Mountains, so the terrain in the vicinity was
frequently better suited to goats than to humans. McCoy knew goats had proven effective in controlling
the spread of kudzu, a fast-growing vine prevalent in Southern states.1 Several local governments had
considered goats as a cost-effective, environmentally sensitive way to maintain large areas of difficult to
reach properties within their jurisdictions. McCoy believed renting goats to local governments to control
noxious weeds, such as kudzu, provided a virtually untapped market for his goat rental business. For
example, the City of Chattanooga, Tennessee had successfully used goats to control kudzu in the past and
had included US$20,000 in its 2010-2011 fiscal year budget to hire goats for kudzu control.2

1
Kudzu is a noxious weed that has become common in most states in the southeastern United States since it was imported
during the 1870s to provide shade in Southern states. The invasive plant grows at an estimated rate of one foot per day and
quickly engulfs any flora or structures it encounters (Blaustein, 2001).
2
Cliff Hightower, Andy Johns and Dave Flessner, “City Bringing Kudzu-munching Goats Back,” Chattanooga Times Free
Press, October 5, 2010.

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McCoy believed his success with the initial goat rental job would lead to additional land clearing work at
the resort and — via word of mouth advertising — opportunities for land clearing jobs with other
landowners. It did not take much for McCoy to envision a year-round goat rental operation. One
advantage of the goats was that their consumption of kudzu and other noxious weeds was not seasonal;
goats are able to consume undesired plants throughout the year. At this stage, McCoy needed to decide
whether to proceed with expansion.

MCCOY’S REVENUES AND COSTS

McCoy had charged the resort owner US$15.00 per day for each goat that he delivered to the resort each
day, which he termed one goat-day, to differentiate it from one calendar day. In order to maximize the
effectiveness of the goats, McCoy filled his goat trailer to its capacity of 25 goats each day. He bid
US$375.00 per calendar day (25 goat-days at US$15 per goat-day). By agreement, the owner rented the
goats for whole days: the owner was charged the full US$375 daily rental, even if the goats only worked
part of the day. It took 25 goats just under seven days to consume all of the plants on the one-acre job site
at the resort.

McCoy hired a part-time shepherd and his dog to manage the resort job. The shepherd performed all
necessary setup work, such as erecting a covered area, a water trough, a mineral lick, and fencing to
enclose the site. When the job was complete, the shepherd removed and transported the materials back to
McCoy’s farm. The trough, covered area and mineral lick cost US$100; the fence cost US$0.75 per linear
foot. The vinyl fence was not reusable so McCoy delivered it to a local recycle center when the job was
complete.

During the resort job, McCoy paid the shepherd US$190 per day to load the goats into a goat trailer each
morning, transport the goats to the job site, and, at the end of each day, load the goats back on the trailer
and transport them back to McCoy’s farm. During the day, the shepherd and his dog made sure the goats
were safe from predators and did not wander away from the job site. A summary of the costs incurred on
the resort job is provided in Exhibit 2.

As McCoy looked at the numbers from his first goat rental job, he realized he was constrained by the 25-
goat capacity of the trailer. He wondered how it would affect profits if he were to upgrade to a trailer with
the capacity to transport more goats. McCoy reasoned that because he paid the shepherd a fixed amount
of US$190 per day, increasing the number of goats delivered to the job site would increase his daily
revenues and daily contribution margin. McCoy knew larger goat trailers were available; he had located
one that could safely accommodate up to 32 goats, approximately 30 per cent more than the capacity of
his current trailer. This would increase his rental rate from US$375 per day to US$480 per day, since he
would continue to fill the trailer to capacity when the goats were delivered to the job site.

McCoy discussed his ideas with the shepherd, and the shepherd indicated he was interested in working
full-time in his capacity as the goat-tender with his dog. The shepherd said he would be willing to commit
to this venture for the same rate he accepted for the resort job. The shepherd insisted on working only five
days each week, working 50 weeks during the year to allow for a vacation.

McCoy decided to purchase rather than rent a larger trailer to transport his goats. He checked with several
suppliers and found a trailer with a 32-goat capacity for a cost of US$7,250. The shepherd accompanied
McCoy when he inspected the trailer and agreed its capacity would be sufficient for their needs. However,

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the shepherd pointed out the truck McCoy used for the resort job did not have the power, suspension, or
drive train needed to pull the larger trailer loaded with goats.

The truck used for the resort job was a spare truck McCoy sometimes used in his farming operation, so
McCoy reasoned he would not necessarily need a new truck to pursue the goat rental operation if he
continued to use the smaller goat trailer. He would only need a larger truck if he decided to invest in a
larger trailer. McCoy knew his old truck would likely need to be replaced in the next five years if he
dedicated it to the goat rental operation.

McCoy scoured the classified ads in the local newspapers as well as web sites specializing in the sale of
used trucks. After some searching, he found a truck that appeared to meet his needs; he and the shepherd
went to inspect it. The shepherd agreed that this truck would be more than adequate, but also observed it
would require a replacement in five years as well. McCoy decided to make an offer; he and the seller
agreed on a price of US$15,000. Taxes and tags on the larger truck and trailer would be an additional 10
per cent of the purchase price of the truck and trailer. The total cost of the larger truck and goat trailer are
provided in Exhibit 3. If he bought the larger truck and trailer, McCoy would sell his current truck and
trailer for US$500 immediately, but in five years they would have no resale value. McCoy estimated the
larger truck and trailer would have a resale value of approximately US$2,500 at the end of five years.

Before purchasing the larger truck and trailer, McCoy took another look at the costs of his goat rental
operation (Exhibit 2). He believed the costs incurred for setup (US$100 per job) were representative of
the costs he would incur on future jobs. In an effort to reduce the US$0.75 per linear foot cost of fencing,
McCoy tried to negotiate a quantity discount based on the amount of business he expected to generate.
However, the supplier was not willing to grant a discount until McCoy had demonstrated the volume of
fencing he purchased warranted this deal. McCoy assumed the average area to be cleared would continue
to be one acre of land. Although dimensions would vary based on the shape of the property, McCoy
expected the average job would require 962 linear feet of fence.

McCoy now had to get a handle on the variable costs in order to assess the long-term profitability of the
goat rental operation. The shepherd had already agreed to the daily rate of US$190 per day; the only
remaining variable costs were the costs of transporting the goats to and from the job site each day. Since
daily transportation costs were directly related to the distance of the job site from McCoy’s farm, McCoy
decided to assume the average job site would be about 40 miles from his farm, resulting in 80 round-trip
miles each day.

When McCoy prepared his bid for the resort job, he had estimated transportation costs to be US$0.63 per
mile, which turned out to be equal to the actual costs for the resort job. However, he knew the rate per
mile for the larger truck and trailer would likely rise because the larger truck was heavier and had a larger
engine; its fuel economy would be much lower. Additionally, the larger truck had a diesel engine and
McCoy knew diesel fuel was generally more expensive than regular gasoline. McCoy had done a lot of
the repair work on the old truck as a “shade-tree” mechanic. Since he lacked experience with diesel
engines, he assumed most of the repairs and maintenance would need to be hired out for the larger truck.
After working with the numbers, McCoy decided to budget transportation costs at US$1.25 per mile for
the larger truck.

Exhibit 4 provides McCoy’s estimates of fixed and variable costs for the goat rental operation.

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ANALYZING THE DECISION

As McCoy began to put his numbers together, he realized the larger trailer would enable him to pursue
more jobs each year than the old trailer, since the greater number of goats would reduce the number of
days required to complete each job. He was still concerned about the costs associated with the larger truck
and trailer though. While he had made a small profit on the resort job, McCoy believed the larger truck
and trailer would increase his per job profits, but he was not entirely confident about this venture. He
decided to compare the profitability of the goat rental operation using his existing truck and trailer versus
the larger truck and trailer.

McCoy first had to calculate the number of jobs he could accept each year. Taking more goats to each
one-acre job meant each job would finish faster, so he could expect to earn more profit by bidding on
more jobs over the year. Knowing the number of jobs and the number of days on each job would also help
him determine expenses for transportation, shepherd and dog, setup and fencing.

McCoy had always used payback period to evaluate his investments. However, he remembered his
accountant telling him about discounted cash flow methods, often used to evaluate investment
opportunities. He called his accountant to get a better explanation, who told McCoy to compute the
incremental cash flows for each year the asset would be in use, and then discount annual cash flows at
McCoy’s cost of capital. McCoy could not confirm his cost of capital at the time, so his accountant
suggested McCoy use 12 per cent as a conservative estimate. Since the 12 per cent cost of capital was
based on a gut feeling, McCoy’s accountant also suggested McCoy compute the internal rate of return on
the investment.

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Exhibit 1

ACTUAL REVENUES AND COSTS FOR THE RESORT LAND-CLEARING JOB

(in U.S. dollars)

Per day Project

Calendar days needed to complete the project1 7

Revenues
Revenue per calendar day $375.00
Total revenues $2,625.00
Variable costs
Transportation costs
Round trip distance (miles) 80
Rate per mile $0.63
Transportation costs per calendar day $50.40
Total transportation costs (352.80)

Shepherd and dog

Rate per calendar day $190.00
Total shepherd and dog costs (1,330.00)
Total variable costs per calendar day $240.40 (1,682.80)
Contribution margin $134.60 $942.20

Fixed costs
Setup (100.00)
Fencing
Linear feet 962
Rate per linear foot $0.75
Total fencing costs (721.50)
Total fixed costs (821.50)
Profit $120.70

Source: Case writers’ calculations.

1
The area cleared was one acre, or 43,560 square feet. At a daily forage rate of 250 square feet per goat, the job required
174.24 goat days. The trailer has a capacity of 25 goats, so it would take 6.97 days for the goats to finish clearing the land.
By agreement, McCoy billed for a full trailer (25 goats) for a full day each day the goats were on site. Therefore, McCoy
billed the owner for seven calendar days (175 goat days).

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Exhibit 2

FIXED AND VARIABLE COSTS FOR RESORT JOB

(in U.S. dollars)

Description
Truck and trailer operation and maintenance costs per mile
$0.63
(transportation costs)
Round trip to resort job site (miles per day) 80
Shepherd and dog costs per day $190.00
Setup costs for resort job $100.00
Fencing costs per linear foot $0.75
Linear feet of fence needed for resort job 962

Source: Case writers’ calculations.

Exhibit 3

COSTS FOR LARGER TRUCK AND TRAILER

(in U.S. dollars)

Description Cost
Heavy duty pickup truck $15,000
20’ used livestock trailer 7,250
Taxes, title, etc. 2,225
Total investment $24,475

Source: Case writers’ calculations.

Exhibit 4

ESTIMATED FIXED AND VARIABLE COSTS FOR GOAT RENTAL OPERATION

WITH A LARGER TRUCK AND TRAILER
(in U.S. dollars)

Larger truck and

Description
trailer
Estimated truck and trailer operation and maintenance costs per
$1.25
mile (transportation costs)
Average round trip to job site (miles per day) 80
Shepherd and dog costs per day $190.00
Setup costs per job $100.00
Fencing costs per linear foot $0.75
Average linear feet of fence needed per job 962

Source: Case writers’ calculations.

This document is authorized for use only in Ruchira Sharma's FT Corporate Finance 2024 at University College Dublin (UCD) from Aug 2024 to Jan 2025.