AGSM 440_ Management of Agricultural Systems II - Texas A_M by hcj

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									Texas A&M University       AGSM 440
                       Precision Agriculture

      February 23 Topics
  • Discussion of Economic
    Analysis approach
  • Assignments
    • HW6-team feedback due 2/23
    • HW7-revised draft due 2/28
Texas A&M University       AGSM 440
                       Precision Agriculture

      Economic Analysis
  • Purpose: to present a
    cost/benefit analysis of your
    proposed solution to the
    client’s problem
  • Requires: Examination of all
    pertinent costs, gains, timing
    of expenses & income
Texas A&M University       AGSM 440
                       Precision Agriculture

      What kind of analysis to do?
  • Return on investment using
    Net Present Value
  • Payback period
  • Comparative cost/benefit
  • Market analysis
  • Meet client expectations!
Texas A&M University       AGSM 440
                       Precision Agriculture

      Common errors in 440
  • Consider only initial investment
    cost (no operating costs)
  • Calculate payback period
    without considering time value
    of money
  • No consideration of alternative
    use of funds
Texas A&M University       AGSM 440
                       Precision Agriculture

      Expectations
  • Identify cost of or losses
    under current system
  • Estimate both initial
    investment and operating
    costs, and the time when
    they occur
  • Estimate gains anticipated
    and time occurring
Texas A&M University       AGSM 440
                       Precision Agriculture

      Steps to Economic Analysis
 1. Know all the requirements of
     the solution and how they
     can be implemented
 2. Determine the costs of the
     current situation
   a) Real costs
   b) Opportunity costs
Texas A&M University       AGSM 440
                       Precision Agriculture

      Steps to Economic Analysis
 3. Determine sequence of steps
    to implement solution, costs
    for and timing of each step
    (total gives installation cost)
 4. Determine operating
    expenses and time incurred
    (depreciation, interest, etc.)
Texas A&M University       AGSM 440
                       Precision Agriculture

      Steps to Economic Analysis
 5. Determine cost savings or
    income and time occurring
 6. Create time series of
    expenses and income
    extending over the entire
    evaluation period
Texas A&M University       AGSM 440
                       Precision Agriculture

      Steps to Economic Analysis
 7. Calculate Net Present Value
    and Internal Rate of Return
    for the cash flow series
 8. Compare IRR to client policy
    on investments or alternative
    uses of funds
Texas A&M University       AGSM 440
                       Precision Agriculture

      Partial Budget
  • Partial budget examines only
    those costs/benefits that will
    change. Provides change in
    profit, not total profit
  • May be most appropriate for
    some projects, but not all
Texas A&M University       AGSM 440
                       Precision Agriculture

      Useful tool
 • Excel has Net Present Value and
   Internal Rate of Return
   calculators that can be used
 • Use Excel Formulas and
   Financial for the functions or go
   to Excel Help
Texas A&M University       AGSM 440
                       Precision Agriculture

      Example
  • Nursery pruner disinfection
    system
  • Evaluate costs and benefits
    for profitability analysis
  • Use partial budget analysis
Texas A&M University       AGSM 440
                       Precision Agriculture

      Example - Solution
  • Solution is addition of
    pressurized solution sprayer
    to existing pruners
  • Safety equipment limited to
    respirators for workers
    mixing solution and
    operating pruner
Texas A&M University        AGSM 440
                        Precision Agriculture

      Example – Current costs
  • Real costs
    • Average plant cost - $1
    • Loss due to disease transfer –
      uncertain, client suggests 1%
    • Plants produced - 435,600/6
      months
  • Opportunity costs
    • Profit per plant - $1.50
Texas A&M University         AGSM 440
                         Precision Agriculture

      Example – Install costs
  • Train workers - $500 for trainer,
    12 hrs @ $10/hr unproductive
    time + fringe benefits of 20%
    = $644, occurs at time = 0
  • Install one sprayer system -
    $3075, occurs at time = 0
  • Total install cost = $3719
Texas A&M University        AGSM 440
                        Precision Agriculture

      Example – Operating costs
  • Solution - $45, monthly
  • System prep time – 6 hr@ $10/hr +
    20% fringes each month - $72
  • Tip and seal replacement – every 6
    months - $175
  • Depreciation – none, not a capital
    expense
  • Interest – none, paid from cash flow
Texas A&M University          AGSM 440
                          Precision Agriculture

      Example - Gains
  • Cost savings (monthly)
     • 72,600 potential sales/month
     • 1% loss, $1/plant
     • Real loss - $726
  • Income gains (monthly)
     • Lost plants * $1.50 profit/plant =
       $1089
     • $726 + $1089 = $1815
Texas A&M University               AGSM 440
                               Precision Agriculture

       Example – time series
   Time period (mon)   Costs         Income
          0            $3719            0
          1             117           1815
          2             117           1815
          3             117           1815
          4             117           1815
          5             117           1815
          6             292           1815
Texas A&M University       AGSM 440
                       Precision Agriculture

      Example – NPV & IRR
  • See Excel file
  • Need to determine interest
    rate for calculation of net
    present value – assume 6%
    annual, or 0.5% per month
  • Evaluate over 6 months
Texas A&M University       AGSM 440
                       Precision Agriculture
Texas A&M University       AGSM 440
                       Precision Agriculture
Texas A&M University       AGSM 440
                       Precision Agriculture

      HW6 In-class Activity
  • As a team, discus the strengths
    and weaknesses of the reports that
    you each read
  • Look for common factors. If the
    same weakness appeared in all
    reports, tell them
  • Prepare the team document to be
    submitted
Texas A&M University       AGSM 440
                       Precision Agriculture

       Report Format
  •   Project title
  •   Common points communicated
  •   Points that differ
  •   Strengths of reports
  •   Weaknesses of reports

								
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