CHAPTER 1: INTRODUCTION 2 CHAPTER 2: WITHOUT PROJECT BUDGETS AT PRIVATE PRICES 3 Without Project Budgets at Private Prices 3 CHAPTER 3: WITHOUT

Transcription

1 CHAPTER 1: INTRODUCTION 2 CHAPTER 2: WITHOUT PROJECT BUDGETS AT PRIVATE PRICES 3 Without Project Budgets at Private Prices 3 CHAPTER 3: WITHOUT PROJECT BUDGETS AT SOCIAL PRICES 7 Social Parity Prices 7 Without Project Social Prices Budgets 8 Appendix A: Computing Export and Import Farm Gate Parity Prices 9 CHAPTER 4: WITH PROJECT BUDGETS AT PRIVATE PRICES 11 With Project Input-Output Coefficients 11 With Project Quantities 12 With Project Private Prices 13 With Project Budgets at Private Prices 13 CHAPTER 5: WITH PROJECT BUDGETS AT SOCIAL PRICES 15 With Project Social Prices 15 With Project Budgets at Social Prices 15 CHAPTER 6: INVESTMENT COSTS 17 CHAPTER 7: INTERNAL RATE OF RETURN 1 1

2 Benefit-Cost Analysis Indonesian Rice System 2

3 CHAPTER 1: INTRODUCTION 2 CHAPTER 2: WITHOUT PROJECT BUDGETS AT PRIVATE PRICES 3 Without Project Budgets at Private Prices 3 CHAPTER 3: WITHOUT PROJECT BUDGETS AT SOCIAL PRICES 7 Social Parity Prices 7 Without Project Social Prices Budgets 8 Appendix A: Computing Export and Import Farm Gate Parity Prices 9 CHAPTER 4: WITH PROJECT BUDGETS AT PRIVATE PRICES 11 With Project Input-Output Coefficients 11 With Project Quantities 12 With Project Private Prices 13 With Project Budgets at Private Prices 13 CHAPTER 5: WITH PROJECT BUDGETS AT SOCIAL PRICES 15 With Project Social Prices 15 With Project Budgets at Social Prices 15 CHAPTER 6: INVESTMENT COSTS 17 CHAPTER 7: INTERNAL RATE OF RETURN 1 1

4 CHAPTER 1: INTRODUCTION Acquiring hands-on skills in computing benefit-cost (B-C) ratios and internal rates of return (IRRs) is an essential part of mastering the quantitative side of project appraisal. The following exercise, based on the Indonesian farming system used in the regional workshop s Basic PAM manual, investigates the desirability of an investment in an irrigation pump. (If the Basic PAM tutorial has already been completed, chap3.xls can be used as a starting point; otherwise, simply follow the instructions for entering the Excel tables shown below.) J.Price Gitinger s book, The Economic Analysis of Agricultural Projects, provides a guide to the concepts and the organization of the IRR computations. Although there is much to be gained from reading the entire book, it is especially important, in doing the tutorial, to look carefully at the highlighted chapters. Reproducing the spreadsheet containing the necessary computations is straightfoward, as is modifying it for larger and more complicated projects. This kind of mastery can be gained in a few hours. Mastering the framework in the Gittinger book is more time consuming, but well worth the effort. As Gittinger notes in Chapter 1, the project appraisal format is an analytical tool. It provides a framework for organizing information from a wide variety of sources. Project analysis says something about the effects of a proposed investment on the participants in the project, whether they are farmers, small firms, government enterprises, or the society as a whole. Looking at the effects on individual participants, we can assess the possible incentives a proposed project has and judge if farmers and others may be successfully be induced to participate. The tutorial consists of a series of basic steps: (1) researching and calculating the without project farming systems budgets at private and social prices, (2) calculating the with project private and social budgets, (3) subtracting the with from the without project budgets to compute a flow of incremental net revenues, (4) estimating the cost of the investment being investigated, and (5) computing the discounted B- C ratio or IRR (internal rate of return) of the capital expenditure. While doing the exercise, it will become apparent that the benefit-cost calculations are closely related to those used in calculating a farming systems PAM. Indeed, there are only three new pieces of information that are not part of the original PAM appraisal: (1) a specification of the resources used in the farming system, e.g., number of hectares devoted to each crop, (2) a quantitative description, in private and social prices, of the investment that is being evaluated, and (2) a second with project input-output table that describes the physical impact (yields, cropping patterns, cropping intensities) of the investment.the rest of the appraisal procedure is a matter of integrating and organizing the new information and utilizing the computational capabilities of the spreadsheet to discount the cash flow expected over the life of the project. 1

5 CHAPTER 2: WITHOUT PROJECT BUDGETS AT PRIVATE PRICES The section in Gittinger (Chapter 2) that describes the role of the with and without project comparson bears careful reading. It is at the heart of a quantitative estimate of an investment s financial (private) and economic (social) value. The project s return lies in the incremental benefits based on the difference between the with and withoutinvestment. It is therefore obvious that an accurate characterization of the without project case is just as important as the projection of the benefits expected from the project. Theoretically, at least, overly pessimistic views of what would transpire in the absence of a project can be as important in producing inflated IRRs as overly optimistic views of what the project is likely to accomplish. The first steps in the tutorial follow the logic discussed in the Gittinger book. Without Project Budgets at Private Prices Input-Output Coefficients If you have started with chap3.xls of the Basic PAM manual, look under the P-Budget tab. You will discover that you already have most of the tables that you will need to create a B-C tutorial. There are, however, several changes that will have to be made in order that the existing tables look like Table 2.1 shown below. (Rename the tab from P-Budget to P-Without.) Change the labels of the activities (crops) to wet season and dry season, thereby calling attention to the fact that the entire exercise now pertains to a farming system. Delete the land row at the bottom of the table. In the Crop Output row, enter the Yield/ha. If you are not starting from the chap3.xls, you will need to open a new Excel spreadsheet, right-click on the Sheet 1 tab and rename it P-Without (no quotes). Table 2.1 provides data on the technical coefficients (units per ha) of the crops in the without project farming system. It is assumed that the overall system has a relatively poor level of water control which accounts for the low productivity under the current conditions. Thus, an irrigation pump would provide, not only more water, but the ability to time the application of water so that it alleviates moisture stress. Not only will there be substantial increases in the output of dry season crops, but the improved water control is assumed to increase the productivity of wet season paddy as well. 3

6 Table 2.1. Without Project Physical Input-Output Coefficients (/ha) Tradables Fertilizer (kg/ha) Urea KCL Chemicals (kg/ha) Seed (kg/ha) Fuel (liters/ha) Factors Labor (hr/ha) Seedbed Prep Crop Care Harvesting Threshing Shelling Drying Capital Working Capital (Rp/ha) 413, , , ,000 Tractor Services (Hr/ha) Thresher (hr/ha) Yield Crop Output(kg/ha) 4,000 2,500 1,500 2,000 The technical coefficients shown in Table 2.1 are based on units per hectare. These must be converted to total resources used in production and total crop output in order to compute the profit from the farming system budgets. For the sake of simplicity, the total land area of the farm is assumed to be 1 hectare and cropping intensity is 200 percent, i.e., the entire area is planted twice a year. Multiplying the technical coefficients (Table 2.1) times the number of hectares available, produces Table 2.2. To minimize the amount of typing, it is easier to create and insert a new Table 2.2 after Table 2.1. Insert approximately 20 rows, copy Table 2.1 below itself, and label the new table: Without Project Total Quantities. Then add a row at the top of the table into which the amount of land available in both wet and dry seasons can be inserted. To compute the cells of Table 2.2, e.g., the amount of fertilizer, fuel, seeds, etc. used, multiply the amount of land times the technical coefficients in Table 2.1. Remember to make the land availability an absolute address (F4) before you start copying the formula into the rest of the column s cells. 4

7 Table 2.2. Without Project Total Quantities Land (ha) Tradables Fertilizer (kg/ha) Urea KCL Chemicals (kg/ha) Seed (kg/ha) Fuel (liters/ha) Factors Labor (hr/ha) Seedbed Prep Crop Care Harvesting Threshing Shelling Drying Capital Working Capital (Rp/ha) 413,000 83,820 44,550 39,930 Tractor Services (Hr/ha) Thresher (hr/ha) Output Total Output(ha) 4, Private Prices Once the resources used and the output produced have been established, these figures can be multiplied times private prices in order to determine project profits at private prices. The prices table should already be entered under the P-Without tab. It is left over from the Basic PAM tutorial. Only a few changes will be needed: (a) re-label the activities to reflect the farming systems orientation of the B-C analysis, and (b) delete the Land row at the bottom of the table. Table 2.3. Private Prices Tradables Fertilizer (Rp/kg) Urea KCL Chemicals (Rp/kg) 1,200 1,200 1,200 1,200 Seed (Rp/kg) ,000 1,000 Fuel (Rp/liters) Factors Labor (Rp/hr) Seedbed Prep Crop Care Harvesting Threshing Shelling Drying Capital Working Capital (%) 30% 30% 30% 30% Tractor Services (Rp/hr) Thresher (Rp/hr) Output Output Prices (Rp/kg)

8 As in the PAM case, private prices are market prices; the prices that farmers face as they sell their produce and purchase their inputs. Units are in Rupiahs/kg or in Rupiahs/hr. Without Project Budgets at Private Prices The budget table created in the Basic PAM tutorial should already be entered. Several of the changes that need to be made to obtain Table 2.4 should by now be obvious. For example, the column headings need to reflect that - makeup of the farming system. Call the new table: Without Project Budgets at Private Prices. Table 2.4. Without Project Budgets at Private Prices Tradables Fertilizer (Rp/ha) Urea 24,000 9,900 7,920 11,880 KCL 12,000 2,970-1,584 Chemicals (Rp/ha) 11,400 3,366 1,584 3,168 Seed (Rp/ha) 14,000 4,620 16,500 11,550 Fuel (Rp/ha) 32,000-2,640 - Factors Labor (Rp/ha) Seedbed Prep 47,400 19,553 10,949 3,911 Crop Care 178,450 67,403 47,820 18,447 Harvesting 41,250 11,138 7,425 9,900 Threshing 20,020 5,363 2,574 3,990 Shelling - - 4,076 - Drying 3,120 1,030 2,574 - Capital Working Capital (Rp/ha) 123,900 25,146 13,365 11,979 Tractor Services (Rp/ha) 11, Thresher (Rp/ha) 90,250 12,540 20,378 - Revenue Total Revenue (Rp/ha) 700, , ,200 99,000 Total Variable Costs (Rp/ha) 608, , ,805 76,408 Profits (Rp/ha) 91,032 (18,652) 139,395 22,592 To obtain the cells of Table 2.4, multiply Table 2.2 (resources and production) times Table 2.3 (prices). Then add two lines to compute profits per crop. To compute costs, sum over all costs. Profits are revenues minus costs. (Reminder: choose the cell that represents the intersection of the Urea and Paddy row and column. Delete contents. Click on the = sign in the status bar at the top of the page and then scroll up to click on the same cell in Table 2.2. The result should be roughly C23 if table alignments are similar to those used in the tutorial. Use the keyboard to enter an asterisk (*) indicating multiply, and click on the same cell in Table 2.2. If the alignments are the same, it would be C41. Now click on the green check arrow to complete the computation. The result should be 24,000.) Use Excel s copy feature to do the budget computations for the remaining cells. (The cash flow analysis will sum over the profits of all crops to obtain the profit per farm.) 6

9 CHAPTER 3: WITHOUT PROJECT BUDGETS AT SOCIAL PRICES One of the central feature of modern benefit-cost analysis is to distinguish between financial (private) and economic (social) costs and returns. Like the PAM analysis, this makes government policy makers--as opposed to simply government engineers--important players in the design and approval of development activities. Whether the cotton or the fertilizer is taxed or subsidized may be as important in determining whether a dam is economically feasible as is the amount of concrete poured or the size of the canals that have been dug. The physical relationships embodied in technical coefficients and resource violabilities do not, of course, have the private and social distinction. Those arise with the introduction of prices. What the new with project input-output table has are changes in the technical relationships that one might expect to occur as a result of changes in the investment activities. Dams are built, ditches dug, pumps installed, new crops planted, additional fertilizer applied, tractors added, etc. Chapter 3 takes the next step in the evaluation process and derives the without project budgets at social prices. As the Basic PAM manual points out, and as Chapter 7 in Gittinger elaborates, this is a fairly complex process. Unless well organized markets exist in which private and social prices can reasonably be assumed to be equal, social prices must always be calculated indirectly from supporting evidence. The procedures for computing export and import parity (social) prices are given in the Appendix to this chapter. However, in the interest of focusing on the IRR calculation, a set of social prices, drawn from the Basic PAM manual, are given in Table 3.3. These are then used to compute the social budgets that appear in Table 3.4. Social Parity Prices To incorporate basic information on social input and output prices contained in the Basic PAM chap3.xls, look under the S-Budget tab. (As a first step, rename the tab to S-Without to reflect the fact that the information will be the without project budget at social prices. Change the labels to reflect the fact that the table reflects an Indonesian rice farm rather than a compilation if individual commodities. Delete the Land row at the bottom of the page. 7

10 T Table 3.3. Social Prices Tradables Fertilizer (Rp/kg) Urea KCL Chemicals (Rp/kg) 7,093 7,093 7,093 7,093 Seed (Rp/kg) Fuel (Rp/liters) Factors Labor (Rp/hr): Seedbed Prep Crop Care Harvesting Threshing Shelling Drying Capital Working Capital (%) 30% 30% 30% 30% Tractor Services (Rp/hr) Thresher (Rp/hr) Output Output Prices (Rp/kg) Examine the social parity prices table carefully to see that they correspond to the table contained in the present tutorial. Without Project Social Prices Budgets In Table 3.4, change the headings of the crop activities to reflect the - makeup of the farming system. Delete the Land row at the bottom of the table and the final row labeled Net Profits. Change the label of the Total Costs row to remove the phrase excluding land. Do the same for the Profits row. If the worksheet has not already done so, subtract costs from total revenues to compute profits. (Check to see that the new Table 3.4 is the same as that shown in the example below.) 8

11 Table 3.4. Without Project Budgets at Social Prices Tradables Fertilizer (Rp/ha) Urea 60,800 25,080 20,064 30,096 KCL 32,600 8,069-4,303 Chemicals (Rp/ha) 67,384 19,896 9,363 18,726 Seed (Rp/ha) 13,545 4,470 3,614 2,934 Fuel (Rp/ha) 23,360-1,927 - Factors Labor (Rp/ha) Seedbed Prep 47,400 19,553 10,949 3,911 Crop Care 178,450 67,403 47,820 18,447 Harvesting 55,000 14,850 9,900 13,200 Threshing 30,800 8,250 3,960 6,138 Shelling - - 6,270 - Drying 4,800 1,584 3,960 - Capital Working Capital (Rp/ha) 123,900 25,146 13,365 11,979 Tractor Services (Rp/ha) 8, Thresher (Rp/ha) 61,750 8,580 13,943 - Output Total Revenue (Rp/ha) 1,420, , ,490 99,660 Total Variable Costs (Rp/ha) 708, , , ,733 Profits (Rp/ha) 711,338 89, ,355 (10,073) Appendix A: Computing Export and Import Farm Gate Parity Prices The essential elements of computing f.o.b. and c.i.f. parity prices at the farm gate prices are shown below: Table 3.5. Computing Parity Prices Item C.i.f. includes F.o.b. cost at point of export Freight charges to point of import Insurance charges Unloading from ship to pier at port excludes Import duties and subsidies Port charges at port of entry for taxes, handling, storage, agents fees, and the like F.o.b. includes All costs to get goods on board -- but still in harbor of exporting country Local marketing and transport costs 9

12 Table 3.5. Computing Parity Prices Item Local port charges including taxes, storage, loading, fumigation, agents fees, and the like Export taxes and subsidies Project boundary price Farm-gate price The detailed mechanics of actually computing the required prices are contained Gittinger, Chaper 3. Determining social (shadow) prices is much more complicated than finding market prices. (As someone once said, at the end of the day, shadow prices are still shadows!) The entire Gittenger, Chapter 7 is devoted to the topic of determining social (economic) values. Of particular significance is the section entitled Adjusting Financial Prices to Economic Values.The steps are summarized in the flow chart at the end of the chapter. 10

13 CHAPTER 4: WITH PROJECT BUDGETS AT PRIVATE PRICES In the PAM analysis, the focus is on government policy as reflected in the divergence between private and social prices. The physical input-output relationships that describe the economic system under investigation remain constant. The extension of the PAM methdology to project evaluation requires that a second set of physical relationships be established, those that result from the implementation of an investment activity. Creating the with project tables can be done in a few steps by copying the without project tables to a new worksheet and then altering the labels. Go to the P-Without tab, select the tables, copy to the clipboard, Insert a new worksheet, and paste in the clipboard material. Re-label the tables to reflect the fact that they pertain to the With Project case. (Rename the tab P-With.) With Project Input-Output Coefficients Table 4.1 reflects changes in the technical coefficients that are assumed to take place as a result of improved water control. For the purposes of the tutorial, these have been greatly simplifed and confined to increases in yields. In actual practice, irrigation pumps would produce a great many changes to the inputoutput table. For example, fuel costs per hectare would go up considerably, labor costs associated with irrigation would need to be added, etc. Indeed, virtually all labor costs would increase because of the increased demands of crop care, harvesting, and threshing. The table below shows the without and with project yields that are used in the two input-output tables.. Yields Without and With Project (kg/ha) Crop Without With Paddy 4,000 5,000 Paddy 2,500 3,750 Soybeans 1,500 2,250 Corn 2,000 3,000 11

14 Table 4.1. With Project Input-Output Coefficients (units/ha) Tradables Fertilizer (kg/ha) Urea KCL Chemicals (kg/ha) Seed (kg/ha) Fuel (liters/ha) Factors Labor (hr/ha) Seedbed Prep Crop Care Harvesting Threshing Shelling Drying Capital Working Capital (Rp/ha) 413, , , ,000 Tractor Services (Hr/ha) Thresher (hr/ha) Yield Crops (kg/ha) 5,000 3,750 2,250 3,000 With Project Quantities The quantities of resources used and amounts of output produced is obtained by multiplying the input-output coefficients per ha times the number of hectares. Ordinarily, on could expect improvements in the quantity and timing of irrigation water to have an effect on both the cropping intensity and the relative importance of different crops in the cropping pattern. For example, high value vegetable crops are very demanding in terms of water control and the addition of an irrigation pump could be expected to increase their role in the farming system. For the sake of simplicity, however, no change have been made in the cropping system and Table 4.2 results from multiplying Table 4.1 times the amount of land under each crop. 12

15 Table 4.2. With Project Total Quantities Land (ha) Tradables Fertilizer (kg/ha) Urea KCL Chemicals (kg/ha) Seed (kg/ha) Fuel (liters/ha) Factors Labor (hr/ha) Seedbed Prep Crop Care Harvesting Threshing Shelling Drying Capital Working Capital (Rp/ha) 413,000 83,820 44,550 39,930 Tractor Services (Hr/ha) Thresher (hr/ha) Output Total Output (kgs) 5,000 1, With Project Private Prices The standard practice in project appraisal is to work in constant prices. IRRs are determined by the difference between the with and without condition and it is assumed that any inflation will affect all values in roughly the same way and hence can be ignored. Table 4.3 is the same as Table 2.3 and is reproduced under the With tab because of the efficiency of copying the entire set of tables from the without to the with worksheet. Table 4.3. Private Prices Tradables Fertilizer (Rp/ha) Urea KCL Chemicals (Rp/ha) 1,200 1,200 1,200 1,200 Seed (Rp/ha) ,000 1,000 Fuel (Rp/ha) Factors Labor (Rp/ha) Seedbed Prep Crop Care Harvesting Threshing Shelling Drying Capital Working Capital (Rp/ha) 30% 30% 30% 30% Tractor Services (Rp/ha) Thresher (Rp/ha) Output Output Prices (Rp/kg) With Project Budgets at Private Prices 13

16 Table 4.4, the with project budgets, is produced in the same way that Table 2.4, the without project budgets was produced. Simply multiply the quantities obtained in Table 4.2 times the prices in Table 4.3. Two additional rows are required to complete the with project budgets. The first of these sums over all costs. The second subtracts costs from revenues. (Total farm profits are obtained in the cash flow analysis by summing over all crop profits.) Table 4.4. With Project Budgets at Private Prices Tradables Fertilizer (Rp/ha) Urea 24,000 9,900 7,920 11,880 KCL 12,000 2,970-1,584 Chemicals (Rp/ha) 11,400 3,366 1,584 3,168 Seed (Rp/ha) 14,000 4,620 16,500 11,550 Fuel (Rp/ha) 32,000-2,640 - Factors Labor (Rp/ha) Seedbed Prep 47,400 19,553 10,949 3,911 Crop Care 178,450 67,403 47,820 18,447 Harvesting 41,250 11,138 7,425 9,900 Threshing 20,020 5,363 2,574 3,990 Shelling - - 4,076 - Drying 3,120 1,030 2,574 - Capital Working Capital (Rp/ha) 123,900 25,146 13,365 11,979 Tractor Services (Rp/ha) 11, Thresher (Rp/ha) 90,250 12,540 20,378 - Output Total Revenue (Rp/ha) 875, , , ,500 Total Variable Costs (Rp/ha) 608, , ,805 76,408 Profits (Rp/ha) 266,032 53, ,995 72,092 14

17 CHAPTER 5: WITH PROJECT BUDGETS AT SOCIAL PRICES By now it is obvious how to proceed from the without to the with project tables. Go to the S-Without tab that contains the Without Project Budgets at Social Prices. Select the tables, copy them to the clipboard, open a new worksheet, and paste in the clipboard materials. Because the input-output coefficients are the same regardless of prices, the worksheet contains only the social prices and budgets tables; the physical quantities have been referenced from earlier computations of budgets at private prices. Limiting the number of data tables in this way makes it easier to do sensitivity analysis on such critical parameters as the increase in yields expected from improved water control. With Project Social Prices For the sake of convenience, all tables from the without project budget are copied in a single step. One of the results is Table 5.3 Social Prices which is the same as Table 3.3. Table 5.3. Social Prices Tradables Fertilizer (Rp/kg) Urea KCL Chemicals (Rp/kg) 7,093 7,093 7,093 7,093 Seed (Rp/kg) Fuel (Rp/liters) Factors Labor (Rp/hr) Seedbed Prep Crop Care Harvesting Threshing Shelling Drying Capital Working Capital (%) 30% 30% 30% 30% Tractor Services (Rp/hr) Thresher (Rp/hr) Output Output Prices (Rp/kg) With Project Budgets at Social Prices The with project budgets are computed using Table 5.3 and Table 4.2. The former reflects input and output social prices, the latter, the quantities associated with the prices. As in the case of previous budget tables, two rows need to be added at the bottom. The first sums over variable costs, the second computes profits, i.e., revenues minus costs.(summing over profits from all crops yields profits for the entire farm.) 15

18 Table 5.4. With Project Budgets at Social Prices Tradables Fertilizer (Rp/ha) Urea 60,800 25,080 20,064 30,096 KCL 32,600 8, ,303 Chemicals (Rp/ha) 67,384 19,896 9,363 18,726 Seed (Rp/ha) 13,545 4,470 3,614 2,934 Fuel (Rp/ha) 23, ,927 0 Factors Labor (Rp/ha) Seedbed Prep 47,400 19,553 10,949 3,911 Crop Care 178,450 67,403 47,820 18,447 Harvesting 55,000 14,850 9,900 13,200 Threshing 30,800 8,250 3,960 6,138 Shelling 0 0 6,270 0 Drying 4,800 1,584 3,960 0 Capital Working Capital (Rp/ha) 123,900 25,146 13,365 11,979 Tractor Services (Rp/ha) 8, Thresher (Rp/ha) 61,750 8,580 13,943 0 Output Total Revenue (Rp/ha) 1,775, , , ,490 Total Variable Costs (Rp/ha) 708, , , ,733 Profits (Rp/ha) 1,066, , ,600 39,757 16

19 CHAPTER 6: INVESTMENT COSTS Variable costs for growing crops have been subtracted from net revenues to compute private and social profits. The next step is to compute the costs of the investment being evluated. When these are subtracted from net revenues, it produces the flow of net benefits that will be discounted to compute the project s IRR. Like other elements of project appraisal, investment expenditures must be broken down into private and social costs. Private costs are those faced by the farmers in the market place when they purchase their pumps. Social costs are computed with the algorithm for calculating import parity prices described in Chapter 3. The figures used below indicate that there are substantial government subsidies on irrigation pumps These costs represent a fraction of the total cost of the pump.the capacity of even a small pump exceeds substantially the hectare of land that the farmer owns and hence it is assumed that the purchase is being made with neighbors or relatives.. Irrigation Pump Costs Item Private Social Irrigation pump 400, ,000 17

20 CHAPTER 7: INTERNAL RATE OF RETURN Once net revenues at the farm level have been computed and investment costs established, it is possible to calculate the cash flow on which the project s internal rate of return will depend. Tables 7.1 and 7.2 calculate the IRR at private and social prices. The calculations in Table 7.1 indicates that the project will be implemented in the first year, i.e., all investment costs will be incurred in year 1. The planning horizon is 10 years. The assumed revenues from full development are not expected to materialize until the 3th year and hence an adjustment factor is required. Table 7.1. Private IRR Calculations Year Investment Adjust Incremental Adjusted Cost Factor Without With Incremental Per Farm Net Benefit 1 400, ,368 - (400,000) , ,986 (4,416) , , , , , , , , , , , , , , , , , , , , , , , ,288 Guess 0.5 IRR 52% Table 7.2 reflects social costs and returns. Table 7.2. Social IRR Calculations Year Investment Adjust Incremental Adjusted Cost Factor Without With Incremental Per Farm Net Benefit 1 600, ,616 - (600,000) , ,142 (124,236) ,616 1,051, , ,616 1,570, , ,616 1,570, , ,616 1,570, , ,616 1,570, , ,616 1,570, , ,616 1,570, , ,616 1,570, ,513 1 Guess 0.5 IRR 46%

21 2