Agricultural Microeconomics Lesson 6: Cost - Benefit Analysis

Presentation Title

This course developed by The Environmental Finance Center at UNC Chapel Hill for The North Carolina School of Science and Math and NCDPI is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License

“Cattle at Sunset” by Andrew S. Gray Photography, Creative Commons CC BY-NC-SAhttp://www.andrewsgray.com/2012/07/cattle-at-sunset/

Agricultural MicroeconomicsLesson 6: Cost - Benefit Analysis

This course developed by The Environmental Finance Center at UNC Chapel Hill for The North Carolina School of Science and Math and NCDPI is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

Why Do a Cost-Benefit Analysis?

• Decide whether to undertake a project.

• Define project objectives.• Develop appropriate before and after

measures of project success.• Prepare estimates of the resources

required to perform the project work.

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

Piedmont Farm

• 100 panel solar PV system• $75,000 estimated cost• Sale of electricity generated• Availability of federal grants and loan

guarantees to assist with financing.

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

Calculating Benefits

How much electrical energy would a 100 panel solar PV system produce

each year?

100 panels x 0.25 kilowatts x 5 hours x 365 days

=45,625 kilowatt hours annually

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

Calculating Benefits

How much estimated revenue will the Farm receive each year?

45,625 kilowatt-hour x $0.07 per kilowatt-hour

=$3,194

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

Calculating Costs

Costs of loan repayment:– $37,500 REAP Guaranteed Loan– 4.0% interest rate– 30 year repayment term– $173 monthly ($2,148 annually)

Operating costs:– $250 each year

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

Preparing Your Own Cost-Benefit Analysis

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

What are your results?YEAR PROJECT COST (CASH) REVENUE

LOAN REPAYMENT

OPERATING COSTS

NET BENEFIT (COST)

CUMMULATIVE NET BENEFIT

0 ($18,750) 0 0 0 ($18,750) ($18,750)1 0 $3,194 ($2,148) ($250) $795 ($17,955)2 0 $3,194 ($2,148) ($250) $795 ($17,159)3 0 $3,194 ($2,148) ($250) $795 ($16,364)4 0 $3,194 ($2,148) ($250) $795 ($15,568)5 0 $3,194 ($2,148) ($250) $795 ($14,773)6 0 $3,194 ($2,148) ($250) $795 ($13,978)7 0 $3,194 ($2,148) ($250) $795 ($13,182)8 0 $3,194 ($2,148) ($250) $795 ($12,387)9 0 $3,194 ($2,148) ($250) $795 ($11,592)

10 0 $3,194 ($2,148) ($250) $795 ($10,796)11 0 $3,194 ($2,148) ($250) $795 ($10,001)12 0 $3,194 ($2,148) ($250) $795 ($9,205)13 0 $3,194 ($2,148) ($250) $795 ($8,410)14 0 $3,194 ($2,148) ($250) $795 ($7,615)15 0 $3,194 ($2,148) ($250) $795 ($6,819)16 0 $3,194 ($2,148) ($250) $795 ($6,024)17 0 $3,194 ($2,148) ($250) $795 ($5,229)18 0 $3,194 ($2,148) ($250) $795 ($4,433)19 0 $3,194 ($2,148) ($250) $795 ($3,638)20 0 $3,194 ($2,148) ($250) $795 ($2,842)21 0 $3,194 ($2,148) ($250) $795 ($2,047)22 0 $3,194 ($2,148) ($250) $795 ($1,252)23 0 $3,194 ($2,148) ($250) $795 ($456)24 0 $3,194 ($2,148) ($250) $795 $33925 0 $3,194 ($2,148) ($250) $795 $1,13526 0 $3,194 ($2,148) ($250) $795 $1,93027 0 $3,194 ($2,148) ($250) $795 $2,72528 0 $3,194 ($2,148) ($250) $795 $3,52129 0 $3,194 ($2,148) ($250) $795 $4,31630 0 $3,194 ($2,148) ($250) $795 $5,111

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

Discussion Questions

• Should Piedmont Farm invest in the solar panels? Why or Why Not?

• Are there any other costs that the farm owners might want to take into consideration?

• Are there other types of projects that the farm might consider instead of solar?

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

Other Scenarios

Presentation Title

This course developed by The Environmental Finance Center at UNC Chapel Hill for The North Carolina School of Science and Math and NCDPI is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License

“Cattle at Sunset” by Andrew S. Gray Photography, Creative Commons CC BY-NC-SAhttp://www.andrewsgray.com/2012/07/cattle-at-sunset/

Next Class: Intro to Spreadsheet Modeling

This course developed by The Environmental Finance Center at UNC Chapel Hill for The North Carolina School of Science and Math and NCDPI is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License