A CALCULATION MODEL FOR INVESTMENTS IN PERENNIAL PLANTINGS

When planting or replacing orchards, often a choice has to be made from a great number of alternatives. Due to important differences in technical and economic aspects such a choice is not always easy. This is certainly the case when one has to take into account future costs and returns over a number of years. In these cases calculations by hand are almost impossible. The model can then make a contribution to this decision process.

For the decision to be calculated, all changes in the cash-flow, directly or indirectly resulting from the investment, have to be taken into account. Because of time differences, time preference of the grower has to be taken into consideration also. Therefore the model that has been developed is based on the net-present value (NPV) method. With the help of this NPV criterion one can, provided it is not applied too mechanically, make a reliable investment evaluation.

Between the different plantings (apples, pears, small fruits, etc.) important differences in life-time can exist. When applying the NPV criterion simply, investments with a longer life-time are soon chosen as being the most attractive. The influence of differences in lifetime can be eliminated by working with the yearly annuity of the net-present value. This method divides the NPV into uniform yearly amounts over the whole life-time of the investment. The present value of these amounts equals the NPV of the investment.

Besides the calculation of the NPV and its annuity, the model enables the calculation of the financial consequences of financing by borrowing capital. Also a review of the liquidity position, taking into account all relevant costs and returns, and the financial liabilities with regard to the borrowed capital can be made.

As standards of risk, the pay-back period and the minimum redemption period can be established. The minimum redemption period is the period necessary for paying back the borrowed capital when all means arising out of the investments are used for this purpose. Investments with a short pay-back period or minimum redemption period are regarded to be less risky.

With the help of the NPV or annuity criterion a choice can be made from the possible alternatives. In the case of replanting, however, this does not imply an answer to the question whether it is an attractive proposition to replace the present planting by the chosen alternative. With the help of the model the best replacing moment can be determined by comparing the annuity of the alternative investment with the grossmargin of the existing orchard.