Cost and Benefit Analysis for Agricultural Project PDF

Cost and Benefit Analysis (CBA) for an Agricultural Project Cost-Benefit Analysis Cost-benefit analysis is a methodology for evaluating the pros and cons of major projects, investments and policy changes by quantifying and comparing costs and benefits in monetary terms. Broadly, CBA has two main pu...

Cost and Benefit Analysis (CBA) for an Agricultural Project Cost-Benefit Analysis Cost-benefit analysis is a methodology for evaluating the pros and cons of major projects, investments and policy changes by quantifying and comparing costs and benefits in monetary terms. Broadly, CBA has two main purposes: 1. To determine if an investment/decision is sound (justification/feasibility) - verifying whether its benefits outweigh the costs, and by how much; 2. To provide a basis for comparing projects - which involves comparing the total expected cost of each option against its total expected benefits. Process of Cost-Benefit Analysis 1. Identification of costs and benefits Identify the costs and benefits associated with a task operation or project. 2. Evaluation of costs and benefits Costs – tangible, intangible, fixed, variable, etc. Benefits – revenue, cost savings, tangible, intangible, etc. 3. Choice of the system Select the best system which involves the least cost and yields maximum benefits. Steps in the Cost-Benefit Analysis Process Step 1. Define the problem This involves understanding the objectives of the project and what needs to be achieved. Step 2. Identify Alternatives Once the problem has been defined, various alternatives can be evaluated for their potential impact on meeting those objectives. This involves looking at different solutions, both in terms of their features and their costs. 3. Calculate costs and benefits Once the alternatives have been evaluated, their costs and benefits can be calculated. This involves estimating both the financial and non-financial costs and benefits of each option. Non-financial cost examples are: Depreciation - The yearly depreciation of a building or piece of equipment Unpaid labor - The farmer chooses to work on the farm instead of getting a wage Charge for owned land - The farmer chooses not to rent out their land Opportunity costs - The cost of using a resource based on what it could have earned if used for the next best alternative Off-site costs - The indirect effects of soil degradation, such as silt, soil nutrients, or agro-chemical products washed into surface water Environmental and sociocultural costs - The costs associated with monocropping systems, such as the low market profitability of rainfed almond monocrops 4. Choose the best alternative Once the costs and benefits of each option have been calculated, the best alternative can be selected. This may involve choosing the option with the lowest cost or highest benefit, or selecting an option that meets both goals. 5. Evaluate the benefits and the costs Once the best alternative has been selected, it can be evaluated for its benefits and costs. This involves measuring how well it meets the objectives of the project and how much it cost to achieve those objectives. Sample cost-benefit analysis following the CBA steps: A mango farm in a tropical region is experiencing high post-harvest losses due to spoilage during transport and wants to decide whether to invest in a cold storage facility to extend shelf life or continue using traditional storage and transport methods. Step 1. Define the Problem The farm's primary objective is to reduce post-harvest losses, improve fruit quality and increase profits. Currently, 25% of the mango harvest is lost during transport due to lack of temperature control. Step 2. Identify Alternatives Option 1 - Continue Traditional Storage and Transport - Use regular wooden crates and open trucks without temperature control. Option 2 - Invest in a Cold Storage Facility and Refrigerated Transport  - Build a cold storage facility at the farm and acquire a refrigerated truck for transport. Step 3. Calculate Costs and Benefits Option 1 - Traditional Storage and Transport (Baseline) Cost/Benefit Value (₱) Notes Harvest Loss (25%) -1,000,000/year Due to spoilage during transport. Transport Cost -300,000/year For regular transport trips. Environmental Cost Non-financial High emissions from multiple trips due to spoilage. Total Cost -1,300,000/year Benefit Value (₱) Notes None N/A Familiar method with no additional training required. Net Annual Value -1,300,000 Option 2 - Cold Storage and Refrigerated Transport Cost/Benefit Value (₱) Notes Initial Cost (Cold Storage) -2,000,000 One-time installation cost. Initial Cost (Truck) -1,500,000 Purchase of refrigerated transport vehicle. Maintenance Cost -100,000/year Annual upkeep for cold storage and truck. Energy Cost -150,000/year Electricity required to operate the cold storage facility. Total Initial Cost -3,500,000 Benefit Value (₱) Notes Reduced Losses (5%) +800,000/year Significant reduction in spoilage compared to baseline. Premium Price Revenue +400,000/year Higher quality mangoes fetch better market prices. Transport Cost Savings +100,000/year Fewer trips required due to less spoilage. Environmental Benefit Non-financial Reduced emissions due to fewer trips. Net Annual Benefit +1,300,000/year Step 4. Choose the Best Alternative Option 2 - (Cold Storage and Refrigerated Transport) is the best choice because it significantly reduces losses, improves fruit quality and offers higher long-term savings and revenue. Step 5. Evaluate the Benefits and Costs After implementing the cold storage system: Benefits: - Post-harvest losses reduced to 5%. - Improved mango quality led to premium market access. - Fewer trips reduced environmental impact and transport costs. Costs:  - Initial investment recovered in 3 years due to the high annual savings. Cost and Benefits Analysis Definitions and Examples Costs In agricultural projects, costs refer to the financial outlay required to carry out the operations and production activities of the project. These include both operational and capital expenditures. Operational expenditures (OpEx) - These are the ongoing costs of running a business, such as employee salaries, utilities, maintenance and administrative expenses. Operational Expenditures (OpEx) - OpEx refers to the ongoing expenses incurred in the day-to-day operation of a business, process, or system. - Operational costs is a broader term and can include all costs related to operating a business or process. It often includes OpEx, but it may also account for other related costs, such as indirect costs. - OpEx and Operational cost both involve expenses related to running operations. - OpEx is typically more specific and used in financial reporting or analysis, focusing on direct, recurring operational expenses. - Operational costs can include both direct and indirect expenses tied to the operation, sometimes encompassing more than just OpEx. Examples of OpEx: Salaries of farmworkers and management staff Fuel for tractors and machinery Fertilizers, pesticides, and other agrochemicals Water and irrigation expenses Electricity for operations such as irrigation pumps or greenhouses Maintenance and repairs of machinery and equipment Seeds and planting materials (for recurring cycles) Transport costs for moving harvested produce to market Insurance premiums for crops and equipment Operational Costs Under OpEx Direct Costs - Fertilizers and pesticides - Fuel for tractors - Labor wages Indirect Costs  - Management salaries - Insurance premiums - Electricity for office operations Capital expenditures (CapEx) - These are the costs of acquiring assets or investments, such as land, buildings, equipment and livestock. CapEx costs are usually long-term, while OpEx costs are usually short-term. Capital Expenditures (CapEx) Long-term investments to establish or expand agricultural operations. Examples Purchase of farmland Construction of farm buildings (barns, silos, greenhouses, etc.) Installation of irrigation systems Purchase of heavy equipment (tractors, harvesters, plows) Establishment of renewable energy systems like solar panels or biogas plants Development of infrastructure (roads, fencing, drainage systems) Acquisition of technology (drones for crop monitoring, farm management software) Initial Investment Under CapEx Land acquisition costs Construction of farm structures (barns, greenhouses, or processing facilities) Purchase of initial equipment (tractors, irrigation systems) Establishment of long-term plantations (e.g., fruit orchards, vineyards) Licensing and permitting fees for agricultural operations a. Operating Costs Operating costs in an agricultural project are the expenses incurred during the day-to-day activities of producing agricultural products. It is the sum of fixed and variable costs. This includes costs for labor, utilities and supplies that are required for continuous production. - Labor Costs - wages and salaries of workers involved in planting, harvesting, irrigation, etc. - Utilities - electricity for irrigation, water costs, fuel for machinery, etc. - Supplies - costs of seeds, fertilizers, pesticides and other consumables. 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑪𝒐𝒔𝒕 = 𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕𝒔 + 𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑪𝒐𝒔𝒕𝒔 b. Fixed Costs Fixed costs are expenses that do not change with the level of production or sales over a specific period. These are incurred regardless of the volume of output.  Examples: Depreciation of machinery, land lease payments, insurance for crops, equipment depreciation and interest on loans. 𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕 = 𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕𝒔 − 𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑪𝒐𝒔𝒕𝒔 c. Variable Costs Variable costs are those that fluctuate depending on the scale of production. They increase or decrease in proportion to the amount of land cultivated or the volume of crops produced. These are expenses that change directly with the level of production or sales. 𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑪𝒐𝒔𝒕𝒔 = 𝑪𝒐𝒔𝒕 𝒑𝒆𝒓 𝑼𝒏𝒊𝒕 × 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒐𝒇 𝑼𝒏𝒊𝒕𝒔 𝑷𝒓𝒐𝒅𝒖𝒄𝒆𝒅 Cost per Unit - The cost to produce one unit (e.g., one hectare of crops). Quantity Produced - The amount of crop or agricultural product produced (e.g., kilograms of rice or tons of corn). d. Maintenance Costs Maintenance costs are the expenses involved in keeping machinery, equipment and infrastructure in working order for agricultural projects, ensuring there is no downtime due to breakdowns or inefficiencies. 𝑻𝒐𝒕𝒂𝒍 𝑴𝒂𝒊𝒏𝒕𝒆𝒏𝒂𝒏𝒄𝒆 𝑪𝒐𝒔𝒕𝒔 (𝑴𝑪) = 𝑳𝒂𝒃𝒐𝒓 𝑪𝒐𝒔𝒕𝒔 + 𝒑𝒓𝒆𝒗𝒆𝒏𝒕𝒊𝒗𝒆 𝒎𝒂𝒊𝒏𝒕𝒆𝒏𝒂𝒏𝒄𝒆 𝒄𝒐𝒔𝒕𝒔 + 𝒄𝒐𝒓𝒓𝒆𝒄𝒕𝒊𝒗𝒆 𝒎𝒂𝒊𝒏𝒕𝒆𝒏𝒂𝒏𝒄𝒆 𝒄𝒐𝒔𝒕𝒔 + 𝒑𝒂𝒓𝒕𝒔 𝒂𝒏𝒅 𝒎𝒂𝒕𝒆𝒓𝒊𝒂𝒍𝒔 + 𝒄𝒐𝒏𝒕𝒓𝒂𝒄𝒕𝒆𝒅 𝒔𝒆𝒓𝒗𝒊𝒄𝒆𝒔 e. Sunk Costs Sunk costs are expenses that have already been incurred and cannot be recovered. These costs should not influence future decision-making for agricultural projects. Example: Past research expenses on crop varieties or soil testing that cannot be refunded. 𝑺𝒖𝒏𝒌 𝑪𝒐𝒔𝒕 = 𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕 𝑰𝒏𝒄𝒖𝒓𝒓𝒆𝒅 − 𝑹𝒆𝒄𝒐𝒗𝒆𝒓𝒂𝒃𝒍𝒆 𝑪𝒐𝒔𝒕𝒔 𝑺𝒖𝒏𝒌 𝑪𝒐𝒔𝒕 = ∑ (𝑰𝒓𝒓𝒆𝒄𝒐𝒗𝒆𝒓𝒂𝒃𝒍𝒆 𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔) f. Contingency Costs Contingency costs are funds set aside for unforeseen expenses that may arise during the agricultural project. These are funds allocated to cover unexpected expenses or uncertainties in a project. 𝑪𝒐𝒏𝒕𝒊𝒏𝒈𝒆𝒏𝒄𝒚 𝑪𝒐𝒔𝒕𝒔 = 𝑷𝒓𝒐𝒋𝒆𝒄𝒕 𝑪𝒐𝒔𝒕 𝒙 𝑪𝒐𝒏𝒕𝒊𝒏𝒈𝒆𝒏𝒄𝒚 𝑹𝒂𝒕𝒆 - Contingency Rate (%) – rate or percentage of the estimated project cost reserved to cover unexpected costs such as natural disasters, pest outbreaks or market price fluctuations. h. Direct and Indirect Costs Direct Costs These are costs that can be directly attributed to the production of agricultural products. Examples - Seed costs, fertilizer, labor directly involved in planting or harvesting and fuel for machinery used on the farm. Indirect Costs These are costs that cannot be directly attributed to a single product or service but are necessary for overall operations. Examples - Administrative salaries, office supplies, farm management software and utilities like water and electricity. BENEFITS Benefits refer to the positive returns generated from an agricultural project. These can be financial (revenue or savings) or non-financial (social or environmental improvements). a. Revenue Revenue is the income generated from selling agricultural products, such as crops, livestock, or processed goods. 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 = 𝑷𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝑼𝒏𝒊𝒕 × 𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝑼𝒏𝒊𝒕𝒔 𝒐𝒓 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑺𝒐𝒍𝒅 - Price per Unit - The selling price for one unit of crop or product (e.g., per kilogram of rice). - Quantity Sold - The amount of product sold in a given period (e.g., tons of vegetables or bags of grain). b. Cost Savings Cost savings come from efficiencies or innovations introduced by the project, such as switching from diesel irrigation to solar-powered systems, which reduce fuel expenses over time. It is the reduction in expenditure achieved by implementing various strategies or measures. 𝑪𝒐𝒔𝒕 𝑺𝒂𝒗𝒊𝒏𝒈𝒔 = 𝑶𝒓𝒊𝒈𝒊𝒏𝒂𝒍 𝑪𝒐𝒔𝒕 − 𝑵𝒆𝒘 𝑪𝒐𝒔𝒕 Examples Savings from using precision irrigation or switching to organic farming. c. Tangible Benefits Tangible benefits are measurable benefits that can be quantified in monetary terms. For example, an increase in crop yield or reduced water usage due to improved irrigation techniques. 𝑻𝒂𝒏𝒈𝒊𝒃𝒍𝒆 𝑩𝒆𝒏𝒆𝒇𝒊𝒕𝒔 = ∑ (𝑸𝒖𝒂𝒏𝒕𝒊𝒇𝒊𝒆𝒅 𝑩𝒆𝒏𝒆𝒇𝒊𝒕𝒔 𝒙 𝑴𝒐𝒏𝒆𝒕𝒂𝒓𝒚 𝑽𝒂𝒍𝒖𝒆) d. Intangible Benefits Intangible benefits are non-measurable and are often difficult to quantify, but they contribute to overall success and improvement in the agricultural community. Example Enhanced farmer knowledge, better community relations, improved workforce morale and increased brand reputation for sustainable practices. e. Non-Market Benefits These are benefits that do not have direct monetary values but still provide a positive impact on society, such as ecosystem services or improved biodiversity. Example Soil health improvements or pollination services from maintaining habitat for bees. f. Social or Environmental Benefits These benefits refer to positive impacts on society or the environment, such as reducing carbon emissions or providing nutritious food to local communities. Example Reduced environmental pollution from the agricultural process, such as less runoff or water contamination. g. Direct and Indirect Benefits Direct Benefits These are benefits that can be directly attributed to the agricultural production activities. Direct Benefit Examples Income from the sale of agricultural Sales of crops, livestock, or processed Revenue products. goods Savings generated by improving Savings from efficient irrigation, reduced Cost Savings production processes. fertilizer use, or solar-powered equipment Tangible Measurable and quantifiable financial Increased crop yield, reduced fuel costs, Benefits gains. higher product quality Employment opportunities created by the New jobs in planting, harvesting, processing, Job Creation project. and transportation Indirect Benefits These are broader benefits that are not directly linked to production but contribute to the overall success and sustainability of the agricultural project. Indirect Benefit Examples Environmental Positive environmental impacts of Reduced carbon emissions, improved soil Benefits the project. health, and water conservation Social or Enhanced food security, community Positive impacts on local Community development, improved access to education communities or social groups. Benefits and healthcare Non-Market Benefits that do not have direct Pollination services, carbon sequestration, or Benefits monetary values. ecosystem restoration Improvement in the public Reputation or Improved brand image from sustainable perception of the project or its Brand Value farming practices, organic certification products. Farmer training programs, sharing of best Knowledge Dissemination of new skills and practices, adoption of advanced farming Transfer expertise. techniques FINANCIAL METRICS AND EVALUATION a. Net Present Value (NPV) NPV measures the difference between the present value of cash inflows (benefits) and outflows (costs). A positive NPV indicates the project is expected to be profitable. Decision Rule: NPV > 0: Project is viable. NPV < 0: Project is not viable Single cash flow If there’s one cash flow from a project that will be paid one year from now, then the calculation for the NPV of the project is as follows: 𝑪𝒂𝒔𝒉 𝒇𝒍𝒐𝒘 𝑵𝑷𝑽 = − 𝒊𝒏𝒊𝒕𝒊𝒂𝒍 𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 (1 + 𝑖)𝑡 where: i = Required return or discount rate t =Number of time periods Multiple cash flow If analyzing a longer-term project with multiple cash flows, then the formula for the NPV of the project is as follows where: Rt =net cash inflow-outflows during a single period t i = discount rate or return that could be earned in alternative investments t = number of time periods Discount Rate The rate used to convert future cash flows into their present value. It’s often based on the cost of capital or the required rate of return. Converting future cash flows into their present value is a fundamental concept in finance, based on the time value of money (TVM) principle. Why Convert Future Cash Flows to Present Value? Money today is worth more than the same amount in the future because: 1. Inflation - Over time, the purchasing power of money decreases due to rising prices. 2. Opportunity Cost - Money today can be invested to earn returns, making it more valuable than the same amount received in the future. 3. Risk - Future cash flows are uncertain, and their value is reduced when adjusted for the risk of not receiving them. b. Benefit-Cost Ratio (BCR) The BCR is the ratio of the present value of benefits to the present value of costs. A BCR greater than 1 indicates a favorable project. c. Internal Rate of Return (IRR) The IRR is the discount rate that makes the NPV of the project equal to zero. It represents the expected annual rate of return on the project investment. Typically, the IRR is calculated iteratively or using financial software. The IRR is a measure of the profitability of the investment. The IRR is the discount rate at which the NPV becomes 0. It is calculated iteratively, typically using software or trial and error. Where: NPV = Net Present Value (set to 0 for IRR calculation). Rt = Cash flow at time t. IRR = Internal Rate of Return (what you are solving for). t = Time period (e.g., year). C0 = Initial investment or upfront cost at t = 0. d. Payback Period The payback period is the time it takes for the project to recover its initial investment through net annual benefits. In the other words, the Payback Period is the time it takes for the cumulative cash inflows to equal the initial investment. 𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 𝑷𝒂𝒚𝒃𝒂𝒄𝒌 𝑷𝒆𝒓𝒊𝒐𝒅 = 𝑨𝒏𝒏𝒖𝒂𝒍 𝑵𝒆𝒕 𝑪𝒂𝒔𝒉 𝑰𝒏𝒇𝒍𝒐𝒘 e. Return on Investment (ROI) ROI measures the percentage return from an investment relative to its initial cost. 𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 𝑹𝑶𝑰 = 𝒙 𝟏𝟎𝟎 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 𝑪𝒐𝒔𝒕 𝑻𝒐𝒕𝒂𝒍 𝒃𝒆𝒏𝒆𝒇𝒊𝒕𝒔 − 𝑻𝒐𝒕𝒂𝒍 𝒄𝒐𝒔𝒕𝒔 𝑹𝑶𝑰 = 𝒙 𝟏𝟎𝟎 𝑻𝒐𝒕𝒂𝒍 𝒄𝒐𝒔𝒕𝒔 Where: Net Profit = Total revenue minus total costs f. Break-Even Analysis Break-even analysis determines the point at which total costs equal total revenues, i.e., when the project neither makes a profit nor incurs a loss. This point, known as the break-even point (BEP), is where total revenues equal total costs. 𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕𝒔 𝑩𝑬𝑷 = 𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝒑𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕 − 𝒗𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝒄𝒐𝒔𝒕 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕  EXERCISES 1. A rice farmer is considering two alternatives to improve water usage efficiency on the farm: 1. Alternative A - Drip Irrigation System - Initial Investment: ₱500,000 - Annual Maintenance Cost: ₱50,000 - Water Savings: ₱100,000/year - Lifespan: 10 years 2. Alternative B - Sprinkler Irrigation System - Initial Investment: ₱300,000 - Annual Maintenance Cost: ₱70,000 - Water Savings: ₱60,000/year - Lifespan: 10 years Assume a discount rate of 5%. a. Cost-Benefit Comparison Using the data provided: 1. Calculate the total cost for each alternative over the 5-year lifespan. 2. Calculate the total savings for each alternative over the 5-year lifespan. 3. Determine which alternative provides the better net benefit. b. Payback Period For each alternative: 1. Calculate the payback period (in years) for the initial investment based on annual savings. 2. Which alternative has a faster payback period? c. Qualitative and Non-Financial Factors In addition to financial calculations, list three non-financial factors the farmer should consider when choosing between the alternatives. Explain how these factors could influence the decision. 2. A farmer is considering an investment in an irrigation system that will generate ₱100,000 savings one year from now. The discount rate is 10%. What is the Net Present Value (NPV) of the project? Give a conclusion from the result 𝑪𝒂𝒔𝒉 𝒇𝒍𝒐𝒘 𝑵𝑷𝑽 = − 𝒊𝒏𝒊𝒕𝒊𝒂𝒍 𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 (1 + 𝑖)𝑡 where: i = Required return or discount rate t =Number of time periods Given: Cash Flow = ₱100,000 discount rate = 10% (0.10) time period = 1 year Conclusion: Is the project financially viable? 2. A farmer wants to build a greenhouse that costs ₱200,000 today. It will generate the following cash inflows. The discount rate is 10%. a. What is the NPV of the project? Year 1 = ₱50,000 Year 2 = ₱70,000 Year 3 = ₱100,000 Where: Rt =net cash inflow at time, t i = discount rate = 10% (0.10) t = time period in years Solution: Calculate NPV year 0 to year 3 and add. The answer should be ₱ -21,562.73. Conclusion: The NPV is ₱ -21,562.73. Since the NPV is negative, the greenhouse project is not financially viable. b. What is the payback period? Initial Investment = ₱200,000 Cumulative Cash Inflows by Year: Year 1 = ₱50,000 Year 2 = ₱50,000 + ₱70,000 = ₱120,000 Year 3 = ₱120,000 + ₱100,000 = ₱220,000 The payback occurs during Year 3: Remaining amount to recover at the end of Year 2: 200,000−120,000 = 80,000 Fraction of Year 3 needed: 80,000 = 0.8 𝑦𝑒𝑎𝑟𝑠 100,000 Payback Period = 2 + 0.8 = 2.8 years c. Calculate the Return on investment (ROI) (𝟓𝟎, 𝟎𝟎𝟎 + 𝟕𝟎, 𝟎𝟎𝟎 + 𝟏𝟎𝟎, 𝟎𝟎𝟎) − 𝟐𝟎𝟎, 𝟎𝟎𝟎 𝑹𝑶𝑰 = 𝒙 𝟏𝟎𝟎 𝟐𝟎𝟎, 𝟎𝟎𝟎 𝑹𝑶𝑰 = 𝟏𝟎% Conclusion: The ROI is 10%, meaning the project earns a 10% return on the initial investment. c. Benefit-cost ration (BCR) d. Break-even point The break-even point occurs when cumulative inflows equal cumulative outflows. 𝑷𝟐𝟎𝟎, 𝟎𝟎𝟎 𝑩𝑬𝑷 = = 𝟔, 𝟔𝟔𝟕 𝒌𝒈 𝑷𝟓𝟎/𝒌𝒈 − 𝑷𝟐𝟎/𝒌𝒈 Conclusion: The project needs to sell 6,667 kilograms or generate ₱333,350 in revenue to break even. 3. A farmer decides to expand his tomato farming business by adding a new 8-hectare plot of land. The goal of this expansion is to increase tomato production and take advantage of the growing demand for tomatoes in the local market. The farmer wants to assess whether the expansion will be profitable and if it will generate a good return on investment. Assumptions: Initial Investment = ₱500,000 (for purchasing land, irrigation system, seeds, and equipment) Expected Annual Revenue = ₱3,268,800 (from the sale of tomatoes) Operating Costs (Year 1) Labor Costs = ₱500,000 Utilities (water, electricity for irrigation) = ₱100,000 Supplies (seeds, fertilizers, pesticides) = ₱150,000 Annual Maintenance Costs for Equipment = ₱20,000 Fixed Costs Depreciation on equipment = ₱40,000 Insurance = ₱10,000 Property taxes = ₱5,000 Variable Costs Cost per unit (per hectare) = ₱60,000 Quantity produced (per hectare) = 8 hectares (108.96 tons of tomatoes per year) Total Variable Costs = ₱480,000 (8 hectares × ₱60,000 per hectare) Revenue Selling Price per Unit = ₱30 per kg of tomatoes Quantity Sold = 108.96 tons (108,960 kg) Total Revenue = ₱3,268,800 (₱30/kg × 108,960 kg) Cost Breakdown Costs Amount (₱) Operating Costs Labor Costs 500,000 Utilities (water, electricity) 100,000 Supplies (seeds, fertilizers) 150,000 Fixed Costs Depreciation on Equipment 40,000 Insurance 10,000 Property Taxes 5,000 Variable Costs Cost per Unit (per hectare) 60,000  Quantity Produced (hectares) 8 Total Variable Costs 480,000 Maintenance Costs 20,000 Contingency Costs (10%) 80,000 Total Costs 1,335,000 Revenue Breakdown Revenue Amount (₱) Selling Price per Unit (per kg) 30 Quantity Sold (kg) 108,960 Total Revenue 3,268,800 Total Revenue Total Revenue is calculated by multiplying the selling price per unit by the quantity sold: 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 = 𝑷𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝑼𝒏𝒊𝒕 𝒙 𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝑼𝒏𝒊𝒕𝒔 𝒐𝒓 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑺𝒐𝒍𝒅 𝟑𝟎 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 = 𝑷 𝒙 𝟏𝟎𝟖, 𝟗𝟔𝟎𝒌𝒈 = 𝑷 𝟑, 𝟐𝟔𝟖, 𝟖𝟎𝟎 𝒌𝒈 Total Costs Total costs include operating costs, fixed costs, variable costs, maintenance costs and contingency costs. 𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕𝒔 = 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑪𝒐𝒔𝒕𝒔 + 𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕𝒔 + 𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑪𝒐𝒔𝒕𝒔 + 𝑴𝒂𝒊𝒏𝒕𝒆𝒏𝒂𝒏𝒄𝒆 𝑪𝒐𝒔𝒕𝒔 + 𝑪𝒐𝒏𝒕𝒊𝒏𝒈𝒆𝒏𝒄𝒚 𝑪𝒐𝒔𝒕𝒔 𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕𝒔 = 𝟓𝟎𝟎, 𝟎𝟎𝟎 + 𝟏𝟎𝟎, 𝟎𝟎𝟎 + 𝟏𝟓𝟎, 𝟎𝟎𝟎 + 𝟒𝟎, 𝟎𝟎𝟎 + 𝟏𝟎, 𝟎𝟎𝟎 + 𝟓, 𝟎𝟎𝟎 + 𝟒𝟖𝟎, 𝟎𝟎𝟎 + 𝟐𝟎, 𝟎𝟎𝟎 + 𝟖𝟎, 𝟎𝟎𝟎 = 𝑷 𝟏, 𝟑𝟑𝟓, 𝟎𝟎𝟎 Net Profit Net Profit is calculated by subtracting the total costs from the total revenue: 𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 = 𝑻𝒐𝒕𝒂𝒍 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 − 𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕𝒔 𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 = 𝟑, 𝟐𝟔𝟖, 𝟖𝟎𝟎 − 𝟏, 𝟑𝟑𝟓, 𝟎𝟎𝟎 = 𝑷 𝟏, 𝟗𝟑𝟑, 𝟖𝟎𝟎 Benefit-Cost Ratio 𝟑, 𝟐𝟔𝟖, 𝟖𝟎𝟎 𝑩𝑪𝑹 = = 𝟐. 𝟒𝟓 𝟏, 𝟑𝟑𝟓, 𝟎𝟎𝟎 Internal Rate of Return (IRR) Trial and error until NPV = 0 Payback Period 𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 𝑷𝒂𝒚𝒃𝒂𝒄𝒌 𝑷𝒆𝒓𝒊𝒐𝒅 = 𝑨𝒏𝒏𝒖𝒂𝒍 𝑵𝒆𝒕 𝑪𝒂𝒔𝒉 𝑰𝒏𝒇𝒍𝒐𝒘 𝑷 𝟓𝟎𝟎, 𝟎𝟎𝟎 𝑷𝒂𝒚𝒃𝒂𝒄𝒌 𝑷𝒆𝒓𝒊𝒐𝒅 = = 𝟎. 𝟐𝟔 𝒚𝒆𝒂𝒓𝒔 ~ 𝟑. 𝟏𝒎𝒐𝒏𝒕𝒉𝒔 𝑷 𝟏, 𝟗𝟑𝟑, 𝟖𝟎𝟎 Return on Investment (ROI) 𝑷 𝟏, 𝟗𝟑𝟑, 𝟖𝟎𝟎 𝑹𝑶𝑰 = 𝒙 𝟏𝟎𝟎 = 𝟑𝟖𝟔. 𝟕𝟔% 𝑷 𝟓𝟎𝟎, 𝟎𝟎𝟎 Break-Even Point 𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕𝒔 𝑩𝑬𝑷 = 𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝒑𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕 − 𝒗𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝒄𝒐𝒔𝒕 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕 𝑷 𝟏, 𝟑𝟑𝟓, 𝟎𝟎𝟎 𝑩𝑬𝑷 = = 𝟏𝟑𝟑, 𝟓𝟎𝟎 𝒌𝒈 𝒐𝒇 𝒕𝒐𝒎𝒂𝒕𝒐𝒆𝒔 𝟑𝟎 − 𝟐𝟎