Precision AgricultureTexas A&M University AGSM 440 February 23 Topics Discussion of Economic Analysis approachDiscussion of Economic Analysis approach

Precision AgricultureTexas A&M University AGSM 440

February 23 TopicsFebruary 23 Topics• Discussion of Economic Discussion of Economic

Analysis approachAnalysis approach

• AssignmentsAssignments

• HW6-team feedback due 2/23HW6-team feedback due 2/23

• HW7-revised draft due 2/28HW7-revised draft due 2/28


Economic AnalysisEconomic Analysis• Purpose: to present a Purpose: to present a

cost/benefit analysis of your cost/benefit analysis of your proposed solution to the proposed solution to the client’s problemclient’s problem

• Requires: Examination of all Requires: Examination of all pertinent costs, gains, timing pertinent costs, gains, timing of expenses & incomeof expenses & income


What kind of analysis to do?What kind of analysis to do?

• Return on investment using Return on investment using Net Present ValueNet Present Value

• Payback periodPayback period

• Comparative cost/benefitComparative cost/benefit

• Market analysisMarket analysis

• Meet client expectations!Meet client expectations!


Common errors in 440Common errors in 440• Consider only initial investment Consider only initial investment

cost (no operating costs)cost (no operating costs)• Calculate payback period without Calculate payback period without

considering time value of moneyconsidering time value of money• No consideration of alternative No consideration of alternative

use of fundsuse of funds


ExpectationsExpectations• Identify cost of or losses under Identify cost of or losses under

current systemcurrent system• Estimate both initial investment Estimate both initial investment

and operating costs, and the and operating costs, and the time when they occurtime when they occur

• Estimate gains anticipated and Estimate gains anticipated and time occurringtime occurring


Steps to Economic AnalysisSteps to Economic Analysis

1.1. Know all the requirements of Know all the requirements of the solution and how they the solution and how they can be implementedcan be implemented

2.2. Determine the costs of the Determine the costs of the current situationcurrent situation

a)a) Real costsReal costs

b)b) Opportunity costsOpportunity costs



3.3. Determine sequence of steps Determine sequence of steps to implement solution, costs to implement solution, costs for and timing of each step for and timing of each step (total gives installation cost)(total gives installation cost)

4.4. Determine operating Determine operating expenses and time incurred expenses and time incurred (depreciation, interest, etc.)(depreciation, interest, etc.)



5.5. Determine cost savings or Determine cost savings or income and time occurringincome and time occurring

6.6. Create time series of Create time series of expenses and income expenses and income extending over the entire extending over the entire evaluation periodevaluation period



7.7. Calculate Net Present Value Calculate Net Present Value and Internal Rate of Return and Internal Rate of Return for the cash flow seriesfor the cash flow series

8.8. Compare IRR to client policy Compare IRR to client policy on investments or alternative on investments or alternative uses of fundsuses of funds


Partial BudgetPartial Budget• Partial budget examines only Partial budget examines only

those costs/benefits that will those costs/benefits that will change. Provides change in change. Provides change in profit, not total profitprofit, not total profit

• May be most appropriate for May be most appropriate for some projects, but not allsome projects, but not all


Useful toolUseful tool• Excel has Net Present Value and Excel has Net Present Value and

Internal Rate of Return Internal Rate of Return calculators that can be usedcalculators that can be used

• Use Excel Formulas and Use Excel Formulas and Financial for the functions or go Financial for the functions or go to Excel Helpto Excel Help


ExampleExample• Nursery pruner disinfection Nursery pruner disinfection

systemsystem

• Evaluate costs and benefits Evaluate costs and benefits for profitability analysisfor profitability analysis

• Use partial budget analysisUse partial budget analysis


Example - SolutionExample - Solution• Solution is addition of Solution is addition of

pressurized solution sprayer pressurized solution sprayer to existing prunersto existing pruners

• Safety equipment limited to Safety equipment limited to respirators for workers mixing respirators for workers mixing solution and operating prunersolution and operating pruner


Example – Current costsExample – Current costs• Real costsReal costs

• Average plant cost - $1Average plant cost - $1

• Loss due to disease transfer – Loss due to disease transfer – uncertain, client suggests 1%uncertain, client suggests 1%

• Plants produced - 435,600/6 Plants produced - 435,600/6 monthsmonths

• Opportunity costsOpportunity costs

• Profit per plant - $1.50Profit per plant - $1.50


Example – Install costsExample – Install costs• Train workers - $500 for trainer, Train workers - $500 for trainer,

12 hrs @ $10/hr unproductive 12 hrs @ $10/hr unproductive time + fringe benefits of 20% time + fringe benefits of 20% = $644, occurs at time = 0= $644, occurs at time = 0

• Install one sprayer system - Install one sprayer system - $3075, occurs at time = 0$3075, occurs at time = 0

• Total install cost = $3719Total install cost = $3719


Example – Operating costsExample – Operating costs

• Solution - $45, monthlySolution - $45, monthly

• System prep time – 6 hr@ $10/hr + System prep time – 6 hr@ $10/hr + 20% fringes each month - $7220% fringes each month - $72

• Tip and seal replacement – every 6 Tip and seal replacement – every 6 months - $175months - $175

• Depreciation – none, not a capital Depreciation – none, not a capital expenseexpense

• Interest – none, paid from cash flowInterest – none, paid from cash flow


Example - GainsExample - Gains• Cost savings (monthly)Cost savings (monthly)

• 72,600 potential sales/month72,600 potential sales/month

• 1% loss, $1/plant1% loss, $1/plant

• Real loss - $726Real loss - $726

• Income gains (monthly)Income gains (monthly)

• Lost plants * $1.50 profit/plant = Lost plants * $1.50 profit/plant = $1089$1089

• $726 + $1089 = $1815$726 + $1089 = $1815


Example – time seriesExample – time seriesTime 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


Example – NPV & IRRExample – NPV & IRR• See Excel fileSee Excel file

• Need to determine interest Need to determine interest rate for calculation of net rate for calculation of net present value – assume 6% present value – assume 6% annual, or 0.5% per monthannual, or 0.5% per month

• Evaluate over 6 monthsEvaluate over 6 months




HW6 In-class ActivityHW6 In-class Activity• As a team, discus the strengths and As a team, discus the strengths and

weaknesses of the reports that you weaknesses of the reports that you each readeach read

• Look for common factors. If the same Look for common factors. If the same weakness appeared in all reports, tell weakness appeared in all reports, tell themthem

• Prepare the team document to be Prepare the team document to be submittedsubmitted


Report FormatReport Format• Project titleProject title

• Common points communicatedCommon points communicated

• Points that differ Points that differ

• Strengths of reportsStrengths of reports

• Weaknesses of reportsWeaknesses of reports

Documents

Precision AgricultureTexas A&M University AGSM 440 February 23 Topics Discussion of Economic Analysis approachDiscussion of Economic Analysis approach