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2 Break-even analysis 25
4 Break-even budgeting 35
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CHAPTER 1
COST AND RETURNS ANALYSIS USED IN DETERMINING THE
PROFITABILITY OF NEW TECHNOLOGIES AND
ENTERPRISES
Introduction
Cost and returns analysis, sometimes called farm income analysis, is the most
common ex-ante or ex-post analytical method of determining the profitability of
different farm practices, technologies, business enterprises, or cropping patterns in a
given accounting period. As an ex-ante analytical tool, cost and returns analysis
provides an estimate of the potential profit that can be derived by prospective
users/investors from adopting a new technology developed by researchers. As an ex-
post analytical tool, cost and returns analysis, on the other hand, determines actual
profit or net income derived after the technology has been adopted. This analytical tool
is not appropriate to use for crops or investment projects that have long gestation
period. In conducting cost and returns analysis, data on input costs, output prices, and
production levels are required. Projected yields, output prices, and input costs should
be used in ex-ante analysis while in ex-post analysis, actual yields, output prices,
and input costs are used.
Forms of Income
2. Non-cash Income - income for which no cash is received. It is the value of output
that is produced that accrues to the producer, but not sold for cash. Non-cash
income may only be considered as part of gross income for ex-post analysis (i.e.,
after farmers have adopted the technology).
1
In estimating non-cash income, those components of output that are not sold
should be valued at market prices. The calculation is normally straightforward in the
case of crops of which gross income is simply yield multiplied by market price received
by the farmer.
Gross income is defined as the value of the total output of the farm or a
processing plant over some accounting period, usually a year, whether or not that
output is sold. It, therefore, includes value of output produced, which is sold, used for
household consumption, used on the farm for seed or livestock feed (i.e., for crops
only), used for payments in kind, or in storage at the end of the accounting period. It
also includes value of by-products and farm produce reused on the farm, produce that
is used again as input in the same farm (e.g., corn produced and used as feed for the
farm livestock enterprise).
Alternative terms for gross income include value of production and gross
return. As mentioned earlier, gross income should be calculated at the farmgate. The
farmgate represents the point of first sale.
Total cost is defined as the value of all inputs used up or expended in farm
production or processing activity. Ideally, the expenses included in any accounting
period should be those incurred in producing the output generated in that period.
Costs can be classified in different ways (i.e., according to the level of output
and the manner it is shouldered).
A. According to the Level of Output
1. Fixed Costs - costs that remain the same regardless of the volume of
output in the short run. The farmer/investor would have to pay them
regardless of how much his/her business produces. Examples of fixed
costs are the following:
a. Land rent. In any one year, the rent paid for land is the same regardless
of whether a farmer/investor cultivates a bumper crop or a poor crop.
2
c. Depreciation of tools, equipment, machineries, and buildings.
Depreciation is also a farm business expense and can be viewed as
such from two different related viewpoints. First, it represents a loss in
value because the item is used in the business to produce income.
Second, it is an accounting procedure to spread the original cost over
the items useful life. It is not appropriate or correct to deduct the full
purchase price as an expense in the year of purchase, as the item will
be used to generate income for many years. Instead, the purchase price
less salvage value is allocated or spread over time through the business
expense called depreciation.
d. Land tax and irrigation fee. These costs do not vary with output. In the
Philippines, irrigation fee in rice production, which is paid in terms of
palay produce (e.g., 2 cavans to 3 cavans per hectare in the wet and
dry season, respectively), is a fixed cost.
h. Water use/bill payments. These are payments for the use of water and
often treated as a fixed cost. However, if a certain enterprise (e.g., food
processing) requires so much water and water consumption varies with
the level of production, then water payment becomes a variable cost.
3
transformed or used up in the production of an output. A farmer/investor or
a researcher has control over these expenses in the short run and they tend
to increase as total production increases.
Home-grown seeds and animal or farmyard manure are also included as non-
cash, variable costs in ex-ante or ex-post analysis since these items are not
purchased. These items need to be valued. Their imputed value (i.e., value at which
these items might have been sold) should be computed by multiplying the levels of
these inputs applied by the prevailing market prices of these inputs.
One of the major problems in using experimental data from research stations
is that labor cost estimates are normally based on what would be spent based on
farmers condition. To resolve this problem, farm wages should be used in the cost and
returns analysis instead of the actual wage paid to laborers hired under the research
project. Labor and power input requirements for the experimental trials are estimated
by frequent interview and/or by stop watch. Only the activities occurring on the plot are
recorded.
Hired labor for different tasks usually requires different wages. Wage rates may
also vary by sex and age (e.g., adult or children), and by the time of the year as
influenced by labor demand by other farmers. Therefore, the labor cost incurred in a
specific farm operation will depend not only on the amount of labor needed, but also
on the nature of the operation.
Data on labor utilization from different sources (e.g., operator, family, hired,
exchange) can be gathered from farmers for actual farm operations or from
experiments in farmers fields (e.g., on-farm trials). In addition to any cash
compensation (i.e., the going wage rate for day laborers in the area), one should also
include the value of non-monetary payments for work such as meals, refreshments,
4
and shares of produce. Farmers themselves can suggest a value for the meals and
refreshments they give. Harvesters are often paid a share of produce. Payments of
produce should be valued at the market value if sold at the farm.
Interest on borrowed capital is also a variable cost. That is, when borrowed
money is used to buy variable inputs in production or to pay for the operating expenses
of the business, interest on operating capital is a variable cost. This is computed by
simply multiplying total variable cost (e.g., sum of material input and hired labor costs
as well as other variable costs) by the prevailing interest rate in the bank (i.e., interest
on borrowed capital).
Examples: Unpaid family labor, land rent paid in kind, home-grown feeds
For inputs that are home-grown or not purchased in the market, their values (or
opportunity cost) must be estimated or imputed to derive their input costs. For example,
if crop production is used on the farm rather than sold (e.g., corn used to feed poultry,
root crops used to feed swine), it should be valued at market price.
Fixed costs can be either cash or non-cash expenses. Since the supply of cash
is often very limited, it is useful to know the degree to which an enterprise requires
heavy cash costs. It is the cash cost that researchers and farmers/investors will be
most aware of. A large part of total fixed cost can be non-cash expenses as shown in
the following chart:
Useful life is the expected number of years the item will be used in the
business. It may be the age at which the item will be completely worn out if the
5
farmer/investor expects to own it that long, or it may be a shorter period if it will be sold
before then. For farm level data in ex-post analysis, the key to determining a useful life
is the number of years the farmer expects to own the item and is, therefore, an estimate
and subject to error. For experimental data in ex-ante analysis, the useful life of the
machinery or equipment is determined by interviewing machinery manufacturers
and/or dealers.
Another estimate is the salvage value or scrap value (terminal value), which
is the items value at the end of its assigned useful life. Salvage value may be zero if
the item will be owned until completely worn out and will have no junk or scrap value
at that time. A positive salvage value should be assigned to an item if it will have some
value or scrap or will be sold before it is completely worn out. In the latter case, the
salvage value should be its estimated market value at the end of its assigned useful
life. In general, the shorter the useful life of a machinery or equipment, the higher will
be its salvage value.
1. Straight-line method. It is the most widely used and the easiest to use.
Annual depreciation is computed from the equation:
The result is the same for either procedure and the total depreciation
over 10 years would be PhP8,160 x 10 years = PhP81,600, reducing the
machines book value to its salvage value of PhP20,400.
6
Annual Depreciation = (Book Value at the Beginning of the Year) x R
Using the previous example, the double declining balance rate would
be 2 x 10% or 20% and the annual depreciation would be computed in the
following manner:
7
Using the same example used earlier, annual depreciation using the sum-of-
the-year's digit method can be computed in the following manner:
Annual depreciation for the three estimation methods can also be computed
with the use of the Microsoft Excel program as shown in Appendix A.
The choice of depreciation method does not change the total depreciation
taken or allowance over the useful life. The depreciation methods affect only the
pattern or distribution of depreciation over time. A final choice of the most appropriate
method will depend on the type of property and the use to be made of the resulting
book value. For example, the actual market value of tractors and other motorized
machinery tends to decline most rapidly during the first few years of life and more
slowly in the later years. If it is important for depreciation on these items to approximate
their actual decline in value, one of the fast depreciation methods should be used.
For properties such as fences and buildings, which provide a rather uniform flow of
services to the business over time, the straight-line method would be appropriate.
8
With regard to other fixed costs, repairs and land tax are always cash expenses
while interest on fixed capital, and land rent may be either cash or non-cash.
Interest on fixed capital is normally charged as a depreciation cost in the case
of farm investments such as farm buildings, machineries, tools and equipment.
Otherwise, the current rate of interest could be applied to the value of investments
including work animals. If this is used, no depreciation cost should be charged to avoid
double counting.
Variable costs can also be classified into cash and non-cash expenses.
Expenses on items such as fertilizers, chemicals, fuels, hired labor, repairs, seeds,
and food ingredients for processing are examples of variable cash costs. Harvesting
labor paid in terms of the share of the harvest is a variable non-cash expense. As
mentioned earlier, the imputed values of homegrown seeds and feeds taken from the
operators farm are considered as variable non-cash costs.
A positive net cash income means that total cash income is greater than total
cash expense.
9
2. Gross Margin or Returns Above Variable Cost - the difference between
total income or gross income and total variable cost. It is the enterprises
contribution to fixed costs after the variable costs have been paid. Most
farmers/investors are concerned principally with either net cash income or
return above variable cost (i.e., gross margin).
Gross margin analysis allows a comparison between various activities and farm
enterprises. It is particularly useful in evaluating the profitability of new technologies,
enterprises and practices in comparison to the farmers current practices. Non-cash
variable cost items should be included in ex-post analysis. If gross margins rise
substantially as a result of new technologies, the farmers would have a strong incentive
to adopt these technologies.
Gross margin does not measure total farm profit but shows the relative
profitability of a new technology versus farmers current practices or a new enterprise
versus the existing enterprise.
A comparison of the variable cost and income factors in the gross margin can
help identify those factors that contribute most to the attractiveness of a new technology
or enterprise. For example, increases in yields could be obtained for a pineapple crop
by adopting improved varieties and applying more fertilizers.
3. Net Farm Income - a measure of profit from the years operation and
represents the return to the owner/investor for his/her personal labor,
management and equity capital used in the farm. It is calculated using the
formula below:
Return to capital is the return to both debt and equity capital so net income
must be adjusted. The interest on debt capital was deducted as an expense in
calculating net income. This interest must be added back to net income before the
return to capital is computed. In other words, net income will be calculated based on
what it would have been if no borrowed capital has been used in the business and then
proceed to compute return to all capital. The calculations would be:
10
Adjusted Net Income = Net Income + Interest on Borrowed Capital
Further adjustments are necessary, as adjusted net income still includes the
return to the owners labor and management as well as the return to all sources of
capital. Therefore, a return to owners labor and management must be subtracted from
the adjusted net income to find the actual return to capital. This is done by estimating
the opportunity cost of the farmers labor and management.
The final step is to convert the return to capital into a percentage of the total
capital invested in the business using the equation below:
where:
Average Capital Inventory = Beginning Inventory + Ending Inventory
or Fixed Capital Investment 2
Steps in Cost and Returns Analysis, Format of a Cost and Returns Table, and
Interpretation of Results
1. Calculate total or gross income which includes cash and non-cash income.
Compute gross income on a per hectare basis (i.e., for a crop production
enterprise). Since total production and net market price have a great effect on
enterprise profitability, they should be carefully estimated. The regular
variability in price due to seasonality should be incorporated into the cost and
returns analysis. This is done most simply by visiting product markets
frequently to obtain prices from the product buyers.
2. Classify costs of production into fixed and variable (cash and non-cash) and
compute for the different items of costs on a per hectare basis (i.e., for a crop
production enterprise). Variable costs such as the costs of seeds, fertilizer, and
other farm chemicals are relatively easy to estimate since the quantities used
and input prices are easy to obtain or are known. In determining the prices of
purchased material inputs, the analyst should check the retail price in the local
retail outlets or wherever the farmers/investors buy the material inputs. Data
on current transportation costs for bulky material inputs, such as seeds and
fertilizers, should be gathered through an interview of farmers in areas where
the technology/enterprise will be recommended. This transportation charge
should be added to the retail price of the purchased inputs. Other variable costs
such as fuel, machinery repairs, oil, and labor are more difficult to estimate
particularly on a per hectare basis. These costs depend on machinery type and
size and the number of tillage operations to be performed. The problem is to
allocate the total variable expenditure for these items fairly among all
enterprises. Without detailed records on machinery and labor use by
enterprise, some estimation will be necessary. The problem of allocation of the
actual interest expense among enterprises should be avoided by including a
11
charge for interest on variable costs. If the same policy is followed for all
enterprises, their profitability can be fairly compared.
a. Per hectare basis. The total machinery fixed cost and other farm overhead
costs can be divided equally among enterprises based on the total area
planted to each crop in the farm. This procedure underestimates machinery
fixed costs for those crops requiring above average machinery use and vice
versa.
b. Gross income basis. The fixed costs can be allocated among the various
enterprises based on their proportion of enterprise gross income to total
gross income. For example, if the gross income from eggplant as a coconut
intercrop is 25% of total gross farm income, 25% of the total fixed costs
should be allocated to eggplant production.
c. Actual use basis. When the detailed records are available, they can be
used to allocate some types of fixed costs. For example, if records on hours
of machinery use by crop enterprise have been kept, the fixed cost per hour
of actual use can be used to allocate the fixed costs back to each
enterprise.
3. Compute total variable cash cost, total variable non-cash cost, total variable
cost, total fixed cash cost, total fixed non-cash cost, total fixed cost, and total
cost per hectare.
4. Compute the different measures of profitability (i.e., net cash income, gross
margin, net income, adjusted net income, return to capital, and rate of return to
capital) and interpret the results.
The general format of a cost and returns table is shown in Table 1.1.
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Table 1.1. Format of cost and returns analysis table
VALUE PER HECTAREa
ITEM
(PhP/ha)
Income
a. Cash Income
b. Non-cash Income
c. Total Income (a + b)
Costs
Cash Costs
Variable Cash Costs
d. Total Variable Cash Cost
Fixed Cash Costs
e. Total Fixed Cash Cost
f. Total Cash Cost (d + e)
Non-cash Costs
Variable Non-cash Costs
g. Total Variable Non-cash Cost
Fixed Non-cash Costs
h. Total Fixed Non-cash Cost
i. Total Non-cash Cost (g + h)
j. Total Cost (f + i)
Net Cash Income (k = a-f)
Gross Margin (c-d)
Net Income (c-j)
Adjusted Net Income (l = k + Interest on Borrowed
Capital)
Return to Capital (m = l Opportunity Cost of
Owners Labor and Management)
Rate of Return to Capital (m/Average Fixed Capital
Investment x 100)
a
Value could also be on a per farm basis
1. Calculate gross income per hectare of improved native garlic by multiplying the
annual garlic production in kilograms (kg) by its farmgate price.
13
2. Classify costs of production into fixed and variable costs and compute for the
different items of costs on a per hectare basis. Variable costs include the costs of
seeds, rice hay, Vital N, vermicompost, inorganic fertilizers, other farm chemicals,
gasoline, oil, hired labor, and interest on variable costs. The cost of each material
input is computed by multiplying the quantity of each material input by its unit price.
Hired labor cost is computed by multiplying labor use in man-days (md) by the
wage rate per day. Fixed cost items are tractor service payment, land charge (i.e.,
measured in terms of land rental rate), and annual depreciation. For ease of
computation, straight-line method was used in estimating annual depreciation.
Note, however, that there are other methods of computing for depreciation
depending on the type of investment item.
14
15
3. Compute total variable cost, total fixed cost, and total cost per hectare.
4. Compute gross margin per hectare (gross income less total variable cost), net
income per hectare (gross income less total cost), net income per kilogram (net
income per hectare divided by annual production per hectare), adjusted net income
per hectare (net income per hectare plus interest on variable costs), return to
capital, and rate of return to capital. Before computing return to capital, net income
has to be adjusted by adding back interest on borrowed capital (i.e., interest on
operating capital). Since hired labor is the only source of labor, the opportunity cost
of the farmers or investors labor and management is zero. Hence, the return to
capital is equal to adjusted net income. Compute rate of return to capital (%) by
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dividing return to capital by the average capital inventory or fixed capital investment
and then multiplying the quotient by 100. Average capital inventory is computed by
adding beginning and ending inventory and then dividing the sum by 2.
Table 1.2 presents the cost and returns table for improved native garlic.
Results of the analysis show that improved native garlic production is profitable as
evidenced from the high and positive gross margin (PhP800,425.52), net income
(PhP760,258.85), and return to capital (PhP782,001.79). Moreover, the estimated rate
of return to capital (RRC) of 121.06% is higher than the ideal RRC of 50%.
17
Table 1.2. Cost and returns analysis of improved native garlic, Ilocos Region,
2016
Price/Unit Amount
Item Unit Qty
(PhP) (PhP/ha)
Gross Income
Improved native garlic sales kilogram 6,140.00 150.00 921,000.00
Total Gross Income 921,000.00
Variable Costs
Seeds kilogram 400.00 80.00 32,000.00
Rice hay truckload 10.00 1,00.00 10,000.00
Vital N pack 1.00 450.00 450.00
Vermicompost bag 5.00 250.00 1,250.00
Fertilizers sack 12.00 10,580.04
Berelex piece 4.00 100.00 400.00
Dithane M 45 kilogram 1.00 350.00 350.00
Foliar/Greebee 2 bottle 2.00 180.00 360.00
Gasoline liter 64.00 26.00 1,664.00
Oil liter 1.00 240.00 240.00
Labor man-day 166.15 250.00 41,537.50
Interest on variable costsa 21,742.94
Total Variable Cost 120,574.48
Fixed Costs
Tractor service 4,500.00
Land rent 30,000.00
Depreciation 5,666.67
Total Fixed Cost 40,166.67
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Example 2. Cost and Returns Analysis of Processed Ubi Powder
Appendix C shows the technical and economic data used in conducting cost
and returns analysis of processed ubi powder as well as the detailed procedures of the
analysis. The steps in conducting cost and returns analysis of processed ubi powder
are presented below:
1. Calculate gross income from the sales of processed ubi powder by multiplying
annual ubi powder sales in packs by its selling price/factory price.
2. Classify processing, overhead, selling and administrative costs into fixed and
variable costs and compute for the different items of costs. Variable costs include
the costs of raw ubi, primary and secondary packaging materials, direct labor, labor
for product distribution, water, electricity, fuel and oil, other laboratory/plant
supplies, market promotion, and interest on variable costs. Fixed cost items are
land charge (i.e., derived by multiplying the purchase cost of land by the interest
on time deposit), license/permits, insurance, realty tax, annual depreciation,
repairs and maintenance, office supplies, and other administrative labor costs. For
ease of computation, straight-line method was used in estimating annual
depreciation. Note, however, that there are other methods of computing for
depreciation depending on the type of investment item.
19
20
21
3. Compute total variable cost, total fixed cost, and total cost per year (i.e., one year
of operation).
22
4. Compute gross margin (gross income less total variable cost), net income (gross
income less total cost), net income per pack (net income divided by annual
production), adjusted net income (net income per plus interest on variable costs),
return to capital, and rate of return to capital. Before computing return to capital,
net income has to be adjusted by adding back interest on borrowed capital (i.e.,
interest on operating capital). Since hired labor is the only source of labor, the
opportunity cost of the farmers or investors labor and management is zero. Hence,
the return to capital is equal to adjusted net income. Compute rate of return to
capital (%) by dividing return to capital by the average capital inventory or fixed
capital investment and then multiplying the quotient by 100. Average capital
inventory is computed by adding beginning and ending inventory and then dividing
the sum by 2.
Table 1.3 presents the cost and returns table for processed ubi powder.
Results of the analysis show that ubi powder processing business is profitable as
evidenced from the high and positive gross margin (PhP3,651,995.58), net income
(PhP2,445,898.58), and return to capital (PhP3,056,850.20). Moreover, the estimated
RRC of 63.42%% is higher than the RRC of 50% or more.
23
Table 1.3. Cost and returns analysis of processed ubi powder, Laguna, 2008
Price/Unit Amount
Item Unit Qty
(PhP) (PhP)
Gross Income
Ubi powder sales pack 176,000 40.00 7,040,000.00
Total Gross Income 7,040,000.00
Variable Costs
Raw ubi kilogram 103,488 11.00 1,138,368.00
Primary packaging material kilogram 334.40 100.00 33,440.00
Secondary packaging
box 176,000 3.00 528,000.00
material
Direct labor man-day 1,760 250.00 440,000.00
Labor for product distribution man-day 128 250.00 32,000.00
Water m3 3,080 26.31 81,034.80
Electricity kwh 17,000 6.63 112,710.00
Fuel and oil liter 1,920 45.00 86,400.00
Other laboratory/plant
184,300.00
supplies
Market promotion 140,800.00
Interest on variable costsa 610,951.62
Total Variable Cost 3,388,004.42
Fixed Costs
Land charge 14,000.00
License/permit 16,000.00
Realty tax 26,000.00
Insurance 100,638.00
Depreciation 423,990.00
Repairs and maintenance 363,190.00
Office supplies 21,159.00
Other administrative labor 241,120.00
Total Fixed Cost 1,206,097.00
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CHAPTER 2
BREAK-EVEN ANALYSIS
Introduction
Results obtained from experimental farms may not always be the same with
that obtained under actual farm conditions because yield/output and output prices vary
considerably by location and time. It is, therefore, necessary to determine the minimum
yield/output and output price needed that would make investors recover at least the
variable expenses or the total cost incurred in using a given production or processing
technology. Estimates of break-even yields and prices can help researchers and
extension workers in giving technology recommendations to farmers and other
investors concerning whether they should continue or stop production to minimize
losses in the short run.
The data contained in a cost and returns table of an enterprise budget can be
used to perform break-even analysis for prices and yields. Break-even prices and
yields/outputs can be calculated from either total cost or total variable cost.
Using the example in Table 1.2 in Chapter 1 (Cost and Returns Analysis), the
break-even yield of improved native garlic would be 1,071.61 kg/ha.
= 1,071.61 kg/ha
If the yield of improved native garlic is higher than the 1,071.61 kg/ha, the
break-even yield, it will be profitable for the investors to grow improved native garlic
given the assumed price of garlic and the production inputs. Conversely, if the yield of
improved native garlic is expected to be lower than the break-even yield, the investors
will incur a loss if they grow this crop.
25
Example 2: Determination of the Break-even Output of Processed Ubi
Powder
Using the data in Table 1.3 in Chapter 1 (Cost and Returns Analysis), the
break-even output of processed ubi powder would be 124,032 packs.
= 114,852.54 packs or
= 652.57 packs/day
This means that if ubi powder output will be lower than 114,852.54 packs, it will
not be profitable to venture into ubi powder processing business. If ubi powder output,
on the other hand, will be higher than the break-even output, the processor will incur
a loss.
b. Break-even Price (BP) - the output refers to the output price needed to
recover all expenses or variable costs incurred in production at a given
output level and prices of the inputs. The formula for computing break-even
output price is:
Using again the data in Table 1.2 in Chapter 1 (Cost and Returns Analysis),
the break-even price of improved native garlic variety would be PhP26.18/kg.
= PhP26.18/kg
This means that if the expected price of improved native garlic is above
PhP26.18/kg, the break-even price, it will be profitable to grow this crop. Conversely,
if the expected price of improved native garlic is below PhP26.18/kg, the investors will
incur a loss if they engage in the production of this crop.
26
Example 4: Determination of the Break-even Price of Ubi Powder
Using again the data in Table 1.3 in Chapter 1 (Cost and Returns Analysis),
the break-even price of ubi powder would be PhP26.10/pack.
= PhP26.10/pack
This means that if the selling price of ubi powder is less than PhP26.10/pack,
it would not be profitable to venture into ubi powder processing business. On the other
hand, if it will be greater than the break-even price, the business becomes profitable.
27
CHAPTER 3
PARTIAL BUDGET ANALYSIS USED IN COMPARING THE
PROFITABILITYOF TWO PRACTICES/
TECHNOLOGIES/OPTIONS
Introduction
Examples:
Examples:
28
Components and Parts of a Partial Budget
Any investment decision can affect profitability in only four possible ways.
1. increasing returns or
2. reducing costs
3. adding costs or
4. reducing returns
The format of a partial budget is shown in Table 3.1. The following are the
steps in partial budgeting:
1. Write down the type of change on the farm or business to be evaluated in the
table title including the location and year being studied.
It is important that the date when on-farm trials were conducted or will be
conducted and the location of the on-farm trials/farmer-managed techno-demo
farms should be specified because profitability of the proposed change would
vary among locations and from one year to another since prices of inputs and
outputs and the technical performance of crops differ among locations and
from one year to another.
2. At the left-hand side of the partial budget table, identify and compute the items
that add to net income (i.e., items that increase gross income and those that
reduce cost). Compute total gains (Total A) as a result of the proposed change.
The total gains figure is the sum of annual added income and annual reduced
costs. This figure is entered at the bottom left of the partial budget table.
3. At the right-hand side of the partial budget table, identify and compute the items
that reduce net income (i.e., items that decrease gross income and those that
increase cost). Compute total losses (Total B) as a result of the proposed
change. The total losses figure is the sum of the annual added costs and annual
reduced income. This figure is entered at the bottom right of the partial budget
table.
4. Compute the change in net income by subtracting total losses from total gains.
A positive figure indicates that the new alternative or the proposed change is
more profitable than the existing practice or vice versa.
29
will be more or less profitable than the present practice with which it is
compared.
Table 3.1. Partial budget for comparing the profitability of ______ vs. _______,
location, year
30
Example 1: Comparing the profitability of pineapple production per hectare
using farmers current practices vs. Good Agricultural Practices
(GAP)
1. Write down the type of change to be evaluated in the table title including the
location and year being studied.
2. At the left-hand side of the partial budget table, identify and compute the items that
add to net income. The items that add to net income are additional gross income
from additional pineapple fruits and reduced costs as a result of adopting Good
Agricultural Practices. Deducting the total gross income figure under current
farmers practices from the total gross income figure under GAP, the additional
gross income would be PhP39,823/ha. This added gross income figure is entered
in the partial budget table under the total gains column. As shown in the partial
budget table, there will be a reduction in the cost of pineapple production if the
farmers will adopt GAP amounting to PhP7,000/ha. This comes from the reduction
in the cost of Karmex (PhP2,750/ha), labor for herbicide application (PhP250/ha),
and labor for land preparation (PhP4,000/ha). Next, compute total gains as a result
of the proposed change. The total gains figure is computed by taking the sum of
annual added gross income and annual reduced costs. The total gains figure (Total
A) amounting to PhP46,823/ha is entered at the bottom left of the partial budget
table.
3. At the right-hand side of each partial budget table, identify and compute the items
that reduce net income. There are cost items that increase or add to total variable
cost. These are the additional organic fertilizer costs to be incurred (PhP2,400/ha),
Malathion cost (PhP700/ha), Borax cost (PhP160/ha), Gibberellic acid
(PhP3,120/ha), labor cost in applying organic fertilizer (PhP1,600/ha), labor cost in
applying insecticide (PhP4,500/ha), labor cost for Gibberellic acid application
(PhP750/ha), and interest on operating capital. Interest on operating cost was
estimated by multiplying the total variable cost by the prevailing interest on
borrowed capital, which is assumed to be 22% per year. The total variable cost
under GAP is PhP 43,480/ha while for current farmers practices, it is PhP
37,250/ha. The difference in the interest on operating capital between GAP and
current farmers practices is PhP1,370.60/ha. The total additional cost will be
PhP14,600.60/ha. There will also be a reduction in gross income from butterballs
(PhP 5,589/ha) if the farmers will adopt GAP. Next, compute total losses as a result
of the proposed change. The total losses figure is computed by taking the sum of
annual added costs and annual reduced returns. The total losses figure (Total B)
amounting to PhP20,189.60/ha is entered at the bottom left of the partial budget
table.
4. Compute the change in net income or profit by subtracting total losses from total
gains. A positive figure amounting to PhP26,633.40/ha indicates that the adoption
of Good Agricultural Practices is more profitable than the current farmers practices
in pineapple production.
31
Table 3.2. Partial budget for comparing the profitability of using farmers current
practices vs. Good Agricultural Practices in pineapple production,
Bicol Region, 2016
TOTAL GAINS TOTAL LOSSES
Added Returns PhP/ha Added Costs PhP/ha
Organic fertilizer cost 2,400.00
Gross income from additional Malathion cost 700.00
39,823
pineapple fruits Borax cost 160.00
Gibberellic acid cost 3,120.00
Labor cost for organic
1,600.00
fertilizer application
Labor cost for insecticide
4,500.00
application
Labor cost for Gibberellic
750.00
acid application
Interest on operating
1,370.60
capitala
Non-pecuniary factor:
32
Example 2: Comparison of the profitability of selling onions immediately after
harvest vs. selling after storing onions for six months in a cold
storage facility
1. Write down the type of change to be evaluated in the table title including the
location and year being studied.
2. At the left-hand side of the partial budget table, identify and compute the items that
add to net income. The item that adds to net income is additional price received by
the farmers as a result of selling onions after six months of storage as compared
to selling the onions immediately after harvest. Deducting the total gross income
figure under selling immediately after harvest from the total gross income figure
under selling after storing onions for six months, the additional gross income would
be PhP22.14/kg of onion sold. This added gross income figure is entered in the
partial budget table under the total gains column. As shown in the partial budget
table, there will be no reduction in the cost of selling onions after six months
storage. Next, compute total gains as a result of the proposed change. The total
gains figure is computed by taking the sum of annual added gross income and
annual reduced costs. The total gains figure (Total A) amounting to PhP22.14/kg
is entered at the bottom left of the partial budget table.
3. At the right-hand side of each partial budget table, identify and compute the items
that reduce net income. There will be no reduction in gross income from storing
onions for six months. However, there are cost items that increase or add to total
variable cost. These are the storage fee to be incurred by the farmers
(PhP6.87/kg), transport cost (PhP0.29/kg), bailing cost (PhP0.11/kg) and interest
on capital (PhP0.80/kg). Interest on operating cost was estimated by multiplying
the total variable cost by the prevailing borrowing rate of 22% per year or 11% for
six months. The total variable cost is PhP7.27/kg. The difference in the interest on
operating capital between selling immediately after harvest and six months storing
of onions before selling amounts to PhP0.07/kg. The total additional cost will be
PhP8.07/kg.
4. Then, compute total losses as a result of the proposed change. The total losses
figure is the sum of the annual added costs and annual reduced income (zero
value). The total losses figure (Total B) amounting to PhP8.07/kg is entered at the
bottom right of the partial budget table.
5. Compute the change in net income or profit by subtracting total losses from total
gains. A positive figure amounting to PhP14.07/kg indicates that storing onions for
six months before selling is more profitable than selling onions immediately.
33
Table 3.3. Partial budget for comparing the profitability of selling immediately
after harvest vs. selling after storing onions for six months in a cold
storage facility, per kilogram, Nueva Ecija, 2016
TOTAL GAINS TOTAL LOSSES
Added Returns PhP/kg Added Costs PhP/kg
Storage rental 6.87
Additional price received for Transport costb 0.29
22.14
storing onions for 6 months Bailing cost 0.11
Interest on operating capitala 0.80
Non-pecuniary factors:
1. Influx of cheap imported or smuggled onions at the same of selling in markets
in Nueva Ecija
2. Deterioration of quality or reduction on weight while in storage
34
CHAPTER 4
BREAK-EVEN BUDGETING
Introduction
1. Select the price of pineapple as the source of uncertainty. Using the data in
Appendix D, use Pp as the coefficient for the break-even price of pineapple in
the break-even budget in Table 4.1 below.
3. Compute total gains (5,689Pp + 7,000), that is the sum of added returns
(5,689Pp) and reduced costs (7,000), and total losses (20,189.60). Set the
change in net income to zero.
4. Solve for Pp. The break-even price of pineapple is PhP2.32/piece. If the price of
pineapple is PhP2.32/piece, the farmer will neither have a gain or loss in profit
when shifting from current practices to GAP. If the price of pineapple is below the
break-even price of PhP2.32/piece, it will not be profitable to engage in pineapple
production using GAP. Conversely, if the price of pineapple is above
PhP2.32/piece, it will be profitable to venture into pineapple production using
GAP.
35
Table 4.1. Break-even budget to determine the break-even price of
pineapple production using GAP, Bicol Region, 2016
TOTAL GAINS TOTAL LOSSES
Added Returns PhP/ha Added Costs PhP/ha
Gross income from
additional pineapple 5,689Pp Organic fertilizer cost 2,400.00
fruits
Malathion cost 700.00
Borax cost 160.00
Gibberellic acid cost 3,120.00
Labor cost for organic
1,600.00
fertilizer application
Labor cost for insecticide
4,500.00
application
Labor cost for Gibberellic
750.00
acid application
Interest on operating
1,370.60
capitala
5,689Pp +
Total A Total B 20,189.60
7,000
Change in Net Income 0 = 5,689Pp + 7,000 20,189.60
1. Select pineapple yield using GAP (Y2) as the source of uncertainty. Using the
data in Appendix D, use Y2 as the coefficient for the break-even yield of
pineapple using GAP in the break-even budget in Table 4.2.
36
3. Compute total gains (7Y2 95,060), that is the sum of added returns (7Y2
102,060) and reduced costs (7,000), and total losses (20,189.60). Set the change
in net income to zero.
4. Solve for Y2. The break-even pineapple yield using GAP is 16,464.23 pieces/ha.
If pineapple yield using GAP is less than the break-even pineapple yield of
16,464.23 pieces/ha, it will not be profitable to shift from current practices to GAP.
Conversely, if pineapple yield using GAP is higher than the break-even yield, it
will be profitable to shift to good agricultural practices.
7Y2
Total A Total B 20,189.60
95,060
Change in Net Income 0 = 7Y2 95,060 20,189.60
37
Example 2: Selling Immediately After Harvest vs. Selling After Storing Onions
for Six Months in a Cold Storage Facility
a. Determination of the Break-even Price of Onion Sold After Storing for Six
Months
1. Select the price of onion as the source of uncertainty. Using the data in Appendix
E, use Po as the coefficient for the break-even price of onion in the break-even
budget in Table 4.3 below.
3. Compute total gains (Po 22.35), that is the sum of added returns (Po 22.35)
and reduced costs (zero value), and total losses (PhP8.07). Set the change in
net income to zero.
4. Solve for Po. The break-even price of onion is PhP30.42/kg. If the price of onion
is PhP30.42/kg, the farmer neither have a gain or loss in profit when shifting from
selling immediately to after six months of storage If the price of onion is below
the break-even price of PhP30.42/kg, it will not be profitable to store onion for six
months in a cold storage facility. Conversely, if the price of onion is above
PhP30.42/kg, it will be profitable to store onions for six months.
Table 4.3. Break-even budget to determine the break-even price for storing
onions for 6 months in a cold storage facility, Nueva Ecija, 2016
TOTAL GAINS TOTAL LOSSES
38
b. Determination of the Break-even Volume of Onions Sold After Storing for Six
Months
1. Select volume of onions sold after six months of storage (Y2) as the source of
uncertainty. Using the data in Appendix E, use Y2 as the coefficient for the break-
even volume of onions sold after six months of storage in Table 4.4.
3. Compute total gains (44.49Y2 22.35), that is the sum of added returns (44.49Y2
22.35) and reduced costs (0), and total losses (8.07). Set the change in net
income to zero.
4. Solve for Y2. The break-even volume of onions sold after six months of storage
is 0.68 kilogram. For every kilogram of onions stored for six months in a cold
storage facility, more than 0.68 kilogram of onions should be sold for the storage
activity to be profitable. If the volume sold after six months of storing one kilogram
of onion is less than 0.68 kilogram, it will not be profitable to store onions for six
months in a cold storage facility.
Table 4.4. Break-even budget to determine the break-even quantity for storing
onions for 6 months in a cold storage facility, Nueva Ecija, 2016
TOTAL GAINS TOTAL LOSSES
Added Returns PhP/kg Added Costs PhP/kg
Gross income from 44.49Y2 -
Storage fee 6.87
storing onions for 6 months 22.35
Transport costa 0.29
Bailing cost 0.11
Interest on operating capitalb 0.80
44.49Y2
Total A Total B 8.07
- 22.35
39
CHAPTER 5
FINANCIAL AND SENSITIVITY ANALYSES
Introduction
A number of mature technologies have long gestation, that is, they produce
benefits that extend over several years. Some of these technologies include food
processing technologies, mechanical technologies, and the use of improved varieties
of perennial crops, among others. Financial/investment analysis rather than simple
cost and returns analysis is the most appropriate tool in determining the commercial
profitability or financial viability of technologies for high-value crops, or investment
projects/enterprises with long gestation period (i.e., those that generate a stream of
costs and benefits). As mentioned earlier, cost and returns analysis is employed in
assessing the profitability of technologies or high-value crops, the benefits and costs
of which are realized in a short production period, usually a year or less than a year.
There are two general measures of financial viability. These are the
undiscounted measures and the discounted measures. These measures will be
discussed further in detail below.
1. Payback Period - the number of years it takes to recover all the capital
invested. The formula for computing the payback period if the stream of
annual gross margin is constant from year to year is as follows:
where:
Average Annual Gross Margin = _Sum of Gross Margin for Each Year_
Number of Years of Project Life
40
Thus, if the initial capital investment of a project is PhP51,000 and the project
is expected to produce a stream of annual gross margin of PhP10,200 per year, the
payback period would be five years (Table 5.1).
However, if the annual gross margin is not equal from year to year, they should
be summed year by year to find the year where the total is equal to the amount of the
fixed capital investment. In Table 5.2 and Table 5.3, the payback period will be three
years because the accumulated gross margin will reach PhP51,000 in the third year.
However, gross margin earned in the first year as shown in Table 5.2 is only
PhP15,300 compared to a higher gross margin of PhP20,400 obtained in the first year
as presented in Table 5.3. A higher gross margin earned in the first year is preferred
because it can be plowed back or reinvested in the business at an earlier period.
41
Case 3: Different annual gross margin from year to year,
high gross margin earned in the first year
GROSS OPERATING GROSS
YEAR REVENUEa EXPENSES MARGINb
(PhP) (PhP) (PhP)
1 20,400 5,100 20,400
2 25,500 10,200 15,300
3 30,600 10,200 15,300
4 35,700 10,200 25,500
5 40,800 15,300 25,500
Total 153,000 51,000 102,000
Average Annual Gross Margin (PhP) 20,400
Initial Capital Investment (PhP) 51,000
Payback Period 3 years
a
Production multiplied by unit price
b
Gross revenue/income minus operating expenses or variable costs
The payback method is easy to use and quickly identifies the investments with
the most immediate gross margin. However, the payback period has two weaknesses,
which leads to misleading choice of investments (Gittinger 1985): (1) it fails to give any
consideration to gross margin earned after the payback date; and (2) it fails to take
into account the differences in the timing of gross margin earned prior to the payback
date. No consideration is given to the time value of money. A peso received during the
first year is given the same weight as a peso received in the second year.
The payback method does not really measure profitability, but it is a measure
of how quickly the investment will contribute to the liquidity of the business. For these
reasons, it can easily lead to poor investment decisions and is not the best method for
investment analysis.
In the example in Table 5.2, the average annual net income is:
= Average Annual Gross Margin - Average Annual Depreciation
42
= PhP20,400 PhP5,100 = PhP15,300
Both investment projects are not profitable because the computed ROIs are
less than 50%. An investment project is considered profitable if the estimated ROI is
50% or more.
The rate of return on investment is better than the payback period because it
considers an investments earnings over its entire life. However, it uses average
annual earnings, which fails to consider the size and timing of annual earnings and
can, therefore, cause errors in selecting investments (Gittinger 1985). This is
particularly true when there are increasing or decreasing net revenues. Because of
this shortcoming, the rate of return on investment is not generally recommended for
analyzing investments.
The most commonly applied profitability indicators assume the concept of "time
value of money". The essence of this concept is that money received or spent at a
particular time has greater value than the same money received or spent at some
future time. For example, PhP10,000 received today would be more valuable than the
same PhP10,000 received a year from now.
D = 1/(1 + r)t
where:
Example: Determine the yearly discount factor at 18% discount rate for a period of
three years.
43
B2 = 25,500 1______ = 25,500 (0.718) = PhP18,309
(1 + 0.18)2
Thus, at a discount rate of 18%, PhP25,500 two and three years from now
would be worth the equivalent of only PhP18,309 and PhP15,529.50, respectively.
Thus, this general formula for discounting involves three elements: (a) the
stream of benefits (or costs); (b) the discount rate; and (c) the discounting period.
Table 5.4 illustrates how the weighted average cost of capital of 15.25% is
calculated. In the example in the table, the bank loan represents 75% of the investors
total funds and is assigned a weight of 0.75. Equity capital accounts for 25% of the
investors total capital and is given a weight of 0.25.
If the source of capital for private investment is only from borrowing, then the
relevant discount rate would be the cost of borrowed capital. The interest charged on
long-term bank loans is usually used as the cost of borrowed capital. In case equity
capital is used for investing on the project, its opportunity cost is used to measure the
cost of capital. The opportunity cost of equity capital is the income foregone from
the best alternative investment if the private investor puts his/her money in an
investment on the proposed project. The opportunity cost of equity capital is more
difficult to measure since there is no interest paid for the use of equity capital and
because of differences in the individual private investors abilities to find alternative
possibilities. For investments on fixed assets using the private investors own funds
and in cases when the investor encounters difficulty in determining the income
foregone from different alternative investment possibilities, the interest on time-
44
deposits is usually used as the income foregone to measure the opportunity cost of
equity capital.
Discounting Period
There are two methods of conducting financial cash flow analysis. These are
the use of: (a) constant prices and (b) current prices of annual project revenues and
costs in the projected financial cash flow statements.
When prices of outputs and inputs are assumed to be constant throughout the
project life in financial cash flow analysis, sensitivity analysis can later on be done to
determine the effect of price changes on the financial viability of the investment project
using NPV and/or IRR as profitability measures or indicators.
45
The residual value/terminal value of a fixed asset is generally added in the last
year of the project.
Example: Determine the residual value of three units of spade (worth PhP204/unit or
a total of PhP612) with a life span of three years to be used in a coconut-vegetable
project with a project life of five years.
Assuming a salvage value of 0, the annual depreciation using the straight-line method will be:
= PhP613/3 = PhP204/year
For the three units of spade purchased in year 4, it will be used only for two years.
Its accumulated depreciation is:
PhP204/yr x 2 yrs = PhP408. Hence, its residual value in year 5 is computed as follows:
With regard to land purchased, the terminal value is entered in the financial
cash flow table at the end of the project. The terminal value of an agricultural land can
be determined by interviewing farmers regarding the buying price of a similar type of
land in the project area. If the land is rented, it is considered not a fixed capital
investment, but part of operating cost.
1. Fixed Capital Investment - the value of each fixed capital item is entered
during the year when it is purchased (for tools, equipment, machinery, land,
and transport vehicles) or constructed (for buildings). Depreciation is not
entered as a cost item in the financial cash flow analysis. Instead, the actual
value of the fixed capital item is considered in the analysis. This is in
contrast to cost and returns analysis which includes depreciation as a cost
item rather than the total value of the fixed capital item.
46
3. Selling and Administrative Expenses - selling and administrative
expenses include marketing costs, office utilities, salaries of administrative
personnel, and communication expenses, among others.
1. Benefit-Cost Ratio (BCR) the ratio of the sum of the stream of present
value (or discounted value) of gross benefits to the sum of the stream of
present value (or discounted value of gross costs. It is computed using the
following formula:
n
BCR = __ B t ______
i=0 (1 + r)t
n
Ct______
i=0 (1 + r)t
The decision rule is to accept investment projects with BCR greater than one.
The steps in calculating the BCR are as follows:
c. Divide the sum of the discounted gross benefits by the sum of the
discounted gross costs.
2. Net Present Value (NPV) the present worth of the incremental net benefits
or the difference between the sum of present values of gross benefits and
gross costs.
There are two ways of calculating NPV. In the first method, NPV is computed
by getting the difference between the sum of the discounted gross benefits and the
sum of the discounted gross costs. Thus, the formula used in calculating NPV in the
first method is as follows:
n n
NPV = ____B t______ - Ct______
i=0 (1 + r)t i=0 (1 + r)t
47
In the second method, NPV is calculated by computing first the yearly net
benefits (i.e., gross benefits gross costs) and then the sum of the discounted
net benefits is computed.
n
NPV = __Bt_-__Ct____
i=0 (1 + r)t
Using the second method, the steps in calculating NPV are as follows:
a. Compute the net benefits in each year. Net benefit in each year is the
difference between gross benefit and gross cost in each year.
b. Compute the discounted net benefit in each year by multiplying the net
benefit in each year by the discount factor in that year.
c. Calculate the sum of the discounted net benefits. The sum or total figure
obtained is the NPV.
Note: To compute annualized net income, multiply the net present value by the
capital recovery factor.
Two examples are presented in this chapter to illustrate how the BCR, NPV,
and IRR are calculated manually for the coconut and coffee project and the ubi powder
processing project. The technical and economic assumptions used in the financial
analysis of these investment projects are shown in Appendix F and Appendix G,
respectively. Computer applications using the Excel software program to calculate
these discounted measures of financial viability for these two investment projects are
also presented in Appendix F and Appendix G.
In this example, coconut is intercropped with coffee. The project life is 10 years
and the discount rate is assumed to be 22% (i.e., borrowing rate). A production loan is
assumed to be the only source of capital. Land will be rented. Data on the gross income
and gross cost in each year shown in Table 5.5 below were derived from Appendix
Table F.7.
48
Table 5.5. Manual calculation of NPV and BCR of coconut and coffee investment
project under base assumptions, Davao, 2016
DISCOUNTED
GROSS GROSS NET
DISCOUNT GROSS GROSS NET
BENEFIT COST BENEFIT
YEAR FACTOR BENEFIT COST BENEFIT
(PhP) (PhP) (PhP)
(22%) (PhP) (PhP) (PhP)
(A) (B) (A - B)
(C) (D) (C-D)
1 66,113 154,236 -88,123 0.820 54,213 126,474 -72,261
2 97,800 98,257 -457 0.672 65,722 66,029 -307
3 134,769 107,657 27,112 0.551 74,258 59,319 14,939
4 152,600 109,946 42,654 0.451 68,823 49,586 19,237
5 184,742 112,277 72,465 0.370 68,355 41,542 26,813
6 226,201 132,667 93,534 0.303 68,538 40,198 28,340
7 241,458 127,735 113,723 0.249 60,123 31,806 28,317
8 231,287 113,120 118,167 0.204 47,183 23,076 24,107
9 205,859 111,292 94,567 0.167 34,378 18,586 15,792
10 225,916 113,722 112,194 0.137 30,950 15,580 15,370
Total 572,543 472,196 100,347
NPV (22%) = Sum of Discounted Gross Benefits - Sum of Discounted Gross Costs
= Total ( C ) - Total ( D ) = PhP572,543 PhP472,196 = PhP100,347
or NPV = Sum of Discounted Net Benefits = Total (C - D) = PhP100,347
The coconut and coffee investment project is financially viable since the BCR is 1.21
or greater than 1.0 and the NPV is positive (i.e., PhP100,347).
49
Table 5.6. Manual calculation of BCR and IRR of ubi powder processing
investment project under base assumptions, Laguna, 2008
DISCOUNTED
GROSS GROSS NET
DISCOUNT GROSS GROSS NET
BENEFIT COST BENEFIT
YEAR FACTOR BENEFIT COST BENEFIT
(PhP) (PhP) (PhP)
(22%) (PhP) (PhP) (PhP)
(A) (B) (A - B)
(C) (D) (C-D)
1 0 5,031,900 -5,031,900 0.820 0 4,126,158 -4,126,158
2 7,040,000 3,545,160 3,494,840 0.672 4,730,880 2,382,348 2,348,532
3 7,040,000 3,545,160 3,494,840 0.551 3,879,040 1,953,383 1,925,657
4 7,040,000 3,545,160 3,494,840 0.451 3,175,040 1,598,867 1,576,173
5 7,040,000 3,545,160 3,494,840 0.370 2,604,800 1,311,709 1,293,091
6 7,040,000 3,703,160 3,336,840 0.303 2,133,120 1,122,057 1,011,063
7 7,040,000 3,545,160 3,494,840 0.249 1,752,960 882,745 870,215
8 7,040,000 3,545,160 3,494,840 0.204 1,436,160 723,213 712,947
9 7,040,000 3,545,160 3,494,840 0.167 1,175,680 592,042 583,638
10 7,990,000 3,545,160 4,444,840 0.137 1,094,630 485,687 608,943
Total 21,982,310 15,178,209 6,804,101
NPV (22%) = Sum of Discounted Gross Benefits - Sum of Discounted Gross Costs
= Total (C) - Total (D) = PhP21,982,310 PhP15,178,209 = PhP6,804,101
The ubi powder processing project is financially viable since the estimated BCR is 1.45
or greater than 1.0 and the NPV is positive (i.e., PhP6,804,101).
3. Internal Rate of Return (IRR) - This is the discount rate that equates the
present values of the projects benefits and costs, so NPV is equal to zero
or the BCR is equal to one. This is also referred to as the average earning
power of money used in the new investment project over the projects life
after all costs have been recovered. The actual rate of return with proper
accounting for the time value of money is the internal rate of return, which
is also called the marginal efficiency of capital or yield on the
investment (Gittinger 1985).
The internal rate of return is the maximum rate of return that an investment
project could pay if all resources were borrowed or if the investment project is to
recover the investment and operating costs and still break even. It can be explained
as a measure of the return on the resources engaged in the investment project.
n n
Bt
(1 + r)t
=
Ct
(1 + r)t
i=0 i=0
50
n n
NP Bt
(1 + r)t
- Ct
(1 + r)t
=0
i=0 i=0
IRR is calculated by the interpolation method or by trial and error method. The
common practice is to apply two discount rates that result in a negative and a positive
NPV and hence, enclose the zero NPV. The following are the steps in calculating FIRR:
a. Choose a discount rate at which the NPV is expected to be positive, and
compute for the NPV. If the NPV is positive, proceed to step b. If the NPV
turns out to be negative, choose one or more lower discount rates until a
positive NPV is obtained. Then proceed to step b.
c. Once two discount rates, one yielding a positive NPV and another yielding
a negative NPV have been obtained, interpolate for the discount rate at
which NPV equals zero. This is the internal rate of return. The interpolation
is shown below:
IRR = Lower Discount Rate + Difference Between the (NPV of Lower Discount Rate)
Two Discount Rates (Absolute Sum of NPVs of
the Two Discount Rates)
Any project or investment with an IRR greater than the opportunity cost of
capital would be a profitable investment. Otherwise, reject the project. Most often, the
opportunity cost of capital used is the interest rate on one-year time deposit.
The IRR of a series of cash flow can exist only when at least one value is
negative. If all the values are positive, no discount rate can make the net present worth
of the stream equal to zero. No matter how high the discount rate, the net present
worth of a series would have to be positive if it includes no negative number.
Table 5.7 shows the manual calculation of IRR for the coconut and coffee
investment project using the interpolation method. The discount rate chosen which
would give a positive NPV is 40% while the discount rate selected which would give a
negative NPV is 45%. The estimated IRR is 44.73%. Hence, the project is financially
viable because IRR is greater than the opportunity cost of capital (22%). The IRR of
44.73% is the break-even discount rate that would make the sum of the discounted or
present value of gross benefits equal to the sum of the discounted or present value of
gross costs.
51
Table 5.7. Manual calculation of IRR of coconut and coffee investment project,
Davao, 2016
DISCOUNTED
GROSS GROSS NET
DISCOUNT GROSS GROSS NET
BENEFIT COST BENEFIT
YEAR FACTOR BENEFIT COST BENEFIT
(PhP) (PhP) (PhP)
(40%) (PhP) (PhP) (PhP)
(A) (B) (A - B)
(C) (D) (C-D)
1 66,113 154,236 -88,123 0.714 47,205 110,125 -62,920
2 97,800 98,257 -457 0.510 49,878 50,111 -233
3 134,769 107,657 27,112 0.364 49,056 39,187 9,869
4 152,600 109,946 42,654 0.260 39,676 28,586 11,090
5 184,742 112,277 72,465 0.186 34,362 20,884 13,478
6 226,201 132,667 93,534 0.133 30,085 17,645 12,440
7 241,458 127,735 113,723 0.095 22,939 12,135 10,804
8 231,287 113,120 118,167 0.068 15,728 7,692 8,035
9 205,859 111,292 94,567 0.048 9,881 5,342 4,539
10 225,916 113,722 112,194 0.035 7,907 3,980 3,927
Total 306,717 295,687 11,030
NPV (40%) = Sum of Discounted Gross Benefits - Sum of Discounted Gross Costs
= Total ( C ) - Total ( D ) = PhP306,717 PhP295,687 = PhP11,030
DISCOUNTED
GROSS GROSS NET
DISCOUNT GROSS GROSS NET
BENEFIT COST BENEFIT
YEAR FACTOR BENEFIT COST BENEFIT
(PhP) (PhP) (PhP)
(45%) (PhP) (PhP) (PhP)
(A) (B) (A - B)
(C) (D) (C-D)
1 66,113 154,236 -88,123 0.690 45,618 106,423 -60,805
2 97,800 98,257 -457 0.476 46,553 46,770 -218
3 134,769 107,657 27,112 0.328 44,204 35,311 8,893
4 152,600 109,946 42,654 0.226 34,488 24,848 9,640
5 184,742 112,277 72,465 0.156 28,820 17,515 11,305
6 226,201 132,667 93,534 0.108 24,430 14,328 10,102
7 241,458 127,735 113,723 0.074 17,868 9,452 8,416
8 231,287 113,120 118,167 0.051 11,796 5,769 6,027
9 205,859 111,292 94,567 0.035 7,205 3,895 3,310
10 225,916 113,722 112,194 0.024 5,422 2,729 2,693
Total 266,404 267,040 -636
NPV (45%) = Sum of Discounted Gross Benefits - Sum of Discounted Gross Costs
= Total ( C ) - Total ( D ) = PhP266,404 PhP267,040 = -PhP636
52
Example 2: Ubi Powder Processing Investment Project
Table 5.8 shows the manual calculation of IRR for the ubi powder processing
investment project using the interpolation method. The discount rate chosen which
would give a positive NPV is 65% while the discount rate selected which would give a
negative NPV is 70%. The estimated IRR is 68.99% or approximately 69%. Hence, the
project is financially viable because IRR is greater than the opportunity cost of capital
(22%). The IRR of 69% is the break-even discount rate that would make the sum of
the discounted or present value of gross benefits equal to the sum of the discounted
or present value of gross costs.
DISCOUNTED
GROSS GROSS NET
DISCOUNT GROSS
BENEFIT COST BENEFIT
YEAR FACTOR BENEFIT GROSS COST NET BENEFIT
(PhP) (PhP) (PhP) (PhP) (PhP)
(70%) (PhP)
(A) (B) (A - B) (D) (C-D)
(C)
1 0 5,031,900 -5,031,900 0.588 0 2,958,757 -2,958,757
2 7,040,000 3,545,160 3,494,840 0.346 2,435,840 1,226,625 1,209,215
3 7,040,000 3,545,160 3,494,840 0.204 1,436,160 723,213 712,947
4 7,040,000 3,545,160 3,494,840 0.120 844,800 425,419 419,381
5 7,040,000 3,545,160 3,494,840 0.070 492,800 248,161 244,639
6 7,040,000 3,703,160 3,336,840 0.041 288,640 151,830 136,810
7 7,040,000 3,545,160 3,494,840 0.024 168,910 85,084 83,876
8 7,040,000 3,545,160 3,494,840 0.014 98,560 49,632 48,928
9 7,040,000 3,545,160 3,494,840 0.008 56,320 28,361 27,959
10 7,990,000 3,545,160 4,444,840 0.005 39,950 17,726 22,224
Total 5,861,980 5,914,808 -52,828
NPV (70%) = Sum of Discounted Gross Benefits - Sum of Discounted Gross Costs
= Total ( C ) - Total ( D ) = PhP5,861,980 PhP5,914,808 = PhP-52,828
or NPV = Sum of Discounted Net Benefits = Total (C - D) = PhP-52,828
53
IRR = 65 + 5 (175,155) = 68.84%
(175,155 + 52,828)
Sensitivity Analysis
Sensitivity analysis was conducted to assess the effects of the following risk
factors on the financial viability of the coconut and coffee investment project presented
earlier.
Table 5.9 shows the sensitivity analysis to assess the effect of a 10% decrease
in gross income/benefits on the financial viability of the project. In Table 5.9, the gross
income/benefit figures are 90% lower than the gross income/benefit figures in Table
5.5. To arrive at the new gross income/benefit figures in Table 9, multiply the gross
income/benefit figures in Table 5.5 by 0.90. Then compute the new NPV and BCR.
54
Table 5.9. Sensitivity analysis of coconut and coffee investment project, Davao, 2016
Case 1: 10% decrease in gross income/benefits
DISCOUNTED
GROSS GROSS NET
DISCOUNT GROSS GROSS NET
BENEFIT COST BENEFIT
YEAR FACTOR BENEFIT COST BENEFIT
(PhP) (PhP) (PhP)
(22%) (PhP) (PhP) (PhP)
(A) (B) (A - B)
(C) (D) (C-D)
1 59,502 154,236 -94,734 0.82 48,791 126,474 -77,683
2 88,020 98,257 -10,237 0.672 59,149 66,029 -6,880
3 121,292 107,657 13,635 0.551 66,832 59,319 7,513
4 137,340 109,946 27,394 0.451 61,940 49,586 12,354
5 166,268 112,277 53,991 0.37 61,519 41,542 19,977
6 203,581 132,667 70,914 0.303 61,685 40,198 21,487
7 217,312 127,735 89,577 0.249 54,112 31,806 22,306
8 208,158 113,120 95,038 0.204 42,464 23,076 19,388
9 185,273 111,292 73,981 0.167 30,942 18,586 12,356
10 203,324 113,722 89,602 0.137 27,855 15,580 12,275
Total 515,289 472,196 43,093
NPV (22%) = Sum of Discounted Gross Benefits - Sum of Discounted Gross Costs
= Total ( C ) - Total ( D ) = PhP515,289 PhP472,196= PhP43,093
Table 5.10 presents the sensitivity analysis to assess the effect of a 10%
increase in gross costs on the financial viability of the project. In Table 5.10, the gross
cost figures are 110% higher than the gross cost figures in Table 5.5. To arrive at the
new gross cost figures in Table 5.10, multiply the gross cost figures in Table 5.5 by
1.10. Then compute the new NPV and BCR.
55
Table 5.10. Sensitivity analysis of coconut and coffee investment project, Davao,
2016
Case 2: 10% increase in gross costs
DISCOUNTED
GROSS GROSS NET
DISCOUNT GROSS GROSS NET
BENEFIT COST BENEFIT
YEAR FACTOR BENEFIT COST BENEFIT
(PhP) (PhP) (PhP)
(22%) (PhP) (PhP) (PhP)
(A) (B) (A - B)
(C) (D) (C-D)
1 66,113 169,660 -103,547 0.820 54,213 139,121 -84,908
2 97,800 108,083 -10,283 0.672 65,722 72,632 -6,910
3 134,769 118,423 16,346 0.551 74,258 65,251 9,007
4 152,600 120,941 31,659 0.451 68,823 54,544 14,279
5 184,742 123,505 61,237 0.370 68,355 45,697 22,658
6 226,201 145,934 80,267 0.303 68,539 44,218 24,321
7 241,458 140,509 100,950 0.249 60,123 34,987 25,136
8 231,287 124,432 106,855 0.204 47,183 25,384 21,799
9 205,859 122,421 83,438 0.167 34,378 20,445 13,933
10 225,916 125,094 100,822 0.137 30,950 17,138 13,812
Total 572,543 519,415 53,127
NPV (22%) = Sum of Discounted Gross Benefits - Sum of Discounted Gross Costs
= Total ( C ) - Total ( D ) = PhP572,543 PhP519,415 = PhP53,127
Results show that the coconut and coffee investment project is more sensitive
to a 10% decrease in gross income/benefits as compared to the same percentage
increase in gross costs. The effects of the two risk factors on NPV are shown in Figure
5.1.
Appendix Tables F.8 and F.9 also present the computerized sensitivity
analysis done for the aforementioned two cases or risk scenarios using the Microsoft
Excel program.
56
Sensitivity Analysis
120,000
100,347
100,000
80,000
NPV (PhP)
60,000 53,127
43,093
40,000
20,000
0
Base Assumptions 10% Decrease in Gross 10% Increase in Gross Costs
Income
Assumptions
Figure 5.1. Results of sensitivity analysis showing the changes in NPV under
the base assumptions and risk scenarios, coconut and coffee
investment project, Davao, 2016
Sensitivity analysis was conducted to assess the effects of the following risk
factors on the financial viability of the ubi powder processing investment project.
Table 5.11 shows the sensitivity analysis to assess the effect of a 10%
decrease in gross income/benefits on the financial viability of the ubi powder
investment project. In Table 5.11, the gross income/benefit figures are 90% lower than
the gross income/benefit figures in Table 5.6. To arrive at the new gross
income/benefit figures in Table 5.11, multiply the gross income/benefit figures in Table
5.6 by 0.90. Then compute the new NPV and BCR.
As shown in Table 5.11, a 10% decrease in gross income from ubi powder will
result to a decrease in NPV to PhP4,653,744 as compared to PhP6,804,101 under
base assumptions. Likewise, the BCR will decrease to 1.30 compared to 1.45 under
base assumptions. Nevertheless, the ubi powder investment project is still financially
viable since NPV >0 and the BCR > 1.0.
57
Table 5.11. Sensitivity analysis of ubi powder processing investment project,
Laguna, 2008
Case 1: 10% decrease in gross income
DISCOUNTED
GROSS GROSS NET
DISCOUNT GROSS GROSS NET
BENEFIT COST BENEFIT
YEAR FACTOR BENEFIT COST BENEFIT
(PhP) (PhP) (PhP)
(22%) (PhP) (PhP) (PhP)
(A) (B) (A - B)
(C) (D) (C-D)
1 0 5,031,900 -5,031,900 0.820 0 4,126,158 -4,126,158
2 6,336,000 3,545,160 2,790,840 0.672 4,257,792 2,382,348 1,875,444
3 6,336,000 3,545,160 2,790,840 0.551 3,491,136 1,953,383 1,537,753
4 6,336,000 3,545,160 2,790,840 0.451 2,857,536 1,598,867 1,258,669
5 6,336,000 3,545,160 2,790,840 0.370 2,344,320 1,311,709 1,032,611
6 6,336,000 3,545,160 2,790,840 0.303 1,919,808 1,074,183 845,625
7 6,336,000 3,545,160 2,790,840 0.249 1,577,664 882,745 694,919
8 6,336,000 3,545,160 2,790,840 0.204 1,292,544 723,213 569,331
9 6,336,000 3,545,160 2,790,840 0.167 1,058,112 592,042 466,070
10 7,191,000 3,545,160 3,645,840 0.137 985,167 485,687 499,480
TOTAL 19,784,079 15,130,335 4,653,744
NPV (22%) = Sum of Discounted Gross Benefits - Sum of Discounted Gross Costs
= Total ( C ) - Total ( D ) = PhP19,784,079 PhP15,130,335
= PhP4,654,744
Table 5.12 presents the sensitivity analysis to assess the effect of a 10%
increase in gross costs on the financial viability of the ubi powder processing
investment project. In Table 5.12, the gross cost figures are 110% higher than the
gross cost figures in Table 5.6. To arrive at the new gross cost figures in Table 5.12,
multiply the gross cost figures in Table 5.6 by 1.10. Then compute the new NPV and
BCR
As shown in Table 5.12, the ubi powder processing investment project is still
financially viable despite the increase in gross costs by 10%. Although the estimated
NPV (i.e., PhP5,286,280) is lower than that under base assumptions (PhP6,804,101),
it is still positive. Moreover, the estimated BCR of 1.32 is lower than the BCR (i.e.,
1.45) under base assumptions.
Comparing the results of the sensitivity analysis of the ubi powder processing
project between the two risk scenarios (i.e., case 1 and case 2), the project is more
sensitive to a 10% decrease in gross income/benefits as compared to the same
percentage increase in gross costs. The effects of the two risk factors on the financial
viability of the ubi powder processing investment project are shown in Figure 5.2.
58
Table 5.12. Sensitivity analysis of ubi powder processing investment project,
Laguna, 2008
Case 2: 10% increase in gross costs
DISCOUNTED
GROSS GROSS NET
DISCOUNT GROSS GROSS NET
BENEFIT COST BENEFIT
YEAR FACTOR BENEFIT COST BENEFIT
(PhP) (PhP) (PhP)
(22%) (PhP) (PhP) (PhP)
(A) (B) (A - B)
(C) (D) (C-D)
1 5,535,090 -5,535,090 0.820 0 4,538,744 -4,538,774
2 7,040,000 3,899,676 3,140,324 0.672 4,730,880 2,620,582 2,110,298
3 7,040,000 3,899,676 3,140,324 0.551 3,879,040 2,148,721 1,730,319
4 7,040,000 3,899,676 3,140,324 0.451 3,175,040 1,758,754 1,416,286
5 7,040,000 3,899,676 3,140,324 0.370 2,604,800 1,442,880 1,161,920
6 7,040,000 4,073,476 2,966,524 0.303 2,133,120 1,234,263 898,857
7 7,040,000 3,899,676 3,140,324 0.249 1,752,960 971,019 781,941
8 7,040,000 3,899,676 3,140,324 0.204 1,436,160 795,534 640,626
9 7,040,000 3,899,676 3,140,324 0.167 1,175,680 651,246 524,434
10 7,990,000 3,899,676 4,090,324 0.137 1,094,630 534,257 560,373
TOTAL 21,982,310 16,696,030 5,286,280
NPV (22%) = Sum of Discounted Gross Benefits - Sum of Discounted Gross Costs
= Total ( C ) - Total ( D ) = PhP21,982,310 PhP16,696,030
= PhP5,286,280
Appendix Tables G.10 and G.11 also present the computerized sensitivity
analysis done for the afore-mentioned two cases or risk scenarios for the ubi powder
processing investment project using the Microsoft Excel program.
Sensitivity Analysis
8,000,000
6,804,101
7,000,000
6,000,000 5,286,280
4,653,744
NPV (PhP)
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
Base Assumptions 10% Decrease in Sales 10% Increase in Gross
Costs
Assumptions
Figure 5.2. Results of sensitivity analysis showing the changes in NPV under
the base assumptions and risk scenarios, ubi powder processing
investment project, Laguna, 2008
59
The Use of Sensitivity Indicator in Sensitivity Analysis
SI = (NPVb - NPV1)
___NVb_____
(Vb - V1)__
Vb
Using the NPV figures calculated earlier for the two scenarios (a 10% decrease
in gross income and a 10% increase in gross costs), the sensitivity indicators for the
two cases or risk scenarios are as follows:
SI = 5.71
Note: disregard sign of -0.1 (i.e., the difference between 1.0 1.1)
SI = 4.71
A high value for the sensitivity indicator indicates project sensitivity to the
variable. In the example above, NPV is more sensitive to a 10% decrease in gross
income compared to the same percentage in increase in gross costs (5.71 > 4.71).
60
SI = (6,804,101 4,653,744) (1.0 - 0.9)
6,804,101 1.0
SI = 3.16
Note: disregard sign of -0.1 (i.e., the difference between 1.0 1.1)
SI = 2.23
A high value for the sensitivity indicator indicates project sensitivity to the
variable. In the example above, NPV is more sensitive to a 10% decrease in gross
income compared to the same percentage in increase in gross costs (3.16 > 2.23).
The switching values for the two cases or risk scenarios are as follows:
61
This means that NPV will become zero (or IRR will be equal to the opportunity
cost of capital) if gross income will decrease by 17.53%. A decrease in gross income
by more than 17.53% will result in a negative NPV and will make the proposed
investment project unprofitable.
Note: disregard sign of -0.1 (i.e., the difference between 1.0 1.1)
SV = 21.25%
This means that NPV will become zero (or IRR will be equal to the opportunity
cost of capital) if gross costs will increase by 21.25%. An increase in total cost by more
than 20.27% will result in a negative NPV and will make the proposed investment
project unprofitable.
SV = 31.64%
This means that NPV will become zero (or IRR will be equal to the opportunity
cost of capital) if ubi powder sales will decrease by 31.64%. A decrease in ubi powder
sales by more than 31.64% will result in a negative NPV and will make the proposed
investment project unprofitable.
Note: disregard sign of -0.1 (i.e., the difference between 1.0 1.1)
SV = 44.83%
This means that NPV will become zero (or IRR will be equal to the opportunity
cost of capital) if total cost will increase by 44.83%. An increase in total cost by more
than 44.83% will result in a negative NPV and will make the proposed investment
project unprofitable.
62
References
ADB. 2010. Session 3.3: Sensitivity and Risk Analysis. Introductory Course on
Economic Analysis of Investment Projects 5-9 July 2010
https://www.adb.org/sites/default/files/page/149401/sensitivity-risk-
analysis-feb2011.pdf
63
APPENDICES
64
APPENDIX A
ESTIMATION OF ANNUAL DEPRECIATION USING THE
MICROSOFT EXCEL PROGRAM
The Microsoft Excel program can be used to compute annual depreciation of a
fixed asset using the three methods of estimating depreciation:
where:
cost is the initial cost of the asset;
salvage is the salvage value of the asset; and
life is the number of periods over which the asset is being depreciated or the
useful life of the asset.
Example:
Using the same example presented under the cost and returns analysis
section, derivation of annual depreciation for a 10-year period for each method of
estimating depreciation with the use of the Microsoft Excel program will be illustrated.
The purchase cost of a machine is PhP102,000 with a salvage value of PhP20,400
and a 10-year useful life.
Using the straight-line method, annual depreciation would be the same from
year 1 to year 10.
Answer generated
65
Double Declining Balance Method (DDB):
where:
period is the number of periods over which the asset is being depreciated;
factor is the rate at which the balance declines. If the factor is omitted, it is
assumed to be 2 (the double declining balance method); and
cost, salvage, and life have already been defined.
Example:
Year 1:
= DDB(102000,20400,10,1) and then press enter
= PhP20,400
Answer generated
Year 2:
= DDB(102000,20400,10,2) and then press enter
= PhP16,320
Year 3:
= DDB(102000,20400,10,3) and then press enter
= PhP13,056
Year 4:
= DDB(102000,20400,10,4) and then press enter
= PhP10,444.80
Year 5:
= DDB(102000,20400,10,5) and then press enter
= PhP8,355.84
Year 6:
= DDB(102000,20400,10,6) and then press enter
= PhP6,684.67
66
Year 7:
= DDB(102000,20400,10,7) and then press enter
= P5,347.74
Year 8:
= DDB(102000,20400,10,8) and then press enter
= PhP990.95
Year 9:
= DDB(102000,20400,10,9) and then press enter
= PhP0
where:
per is the period and must use the same units as life; and
cost, salvage, and life have already been defined.
Example:
Year 1:
= SYD(102000,20400,10,1) and press enter
= PhP14,836.36
Answer generated
Year 2:
= SYD(102000,20400,10,2) and press enter
= PhP13,352.73
Year 3:
= SYD(102000,20400,10,3) and press enter
= PhP11,869.09
Year 4:
= SYD(102,000,20400,10,4) and press enter
=PhP10,385.45
67
Year 5:
= SYD(102000,20400,10,5) and press enter
= PhP8,901.82
Year 6:
= SYD(102000,20400,10,6) and press enter
= P7,418.18
Year 7:
= SYD(102,000,20400,10,7) and press enter
=PhP5,934.55
Year 8:
= SYD(102000,20400,10,8) and press enter
= PhP4,450.91
Year 9:
= SYD(102000,20400,10,9) and press enter
= PhP2,967.27
Year 10:
= SYD(102000,20400,10,9) and press enter
= PhP1,483.64
68
APPENDIX B
COST AND RETURNS ANALYSIS OF
IMPROVED NATIVE GARLIC
A. Assumptions Used in Cost and Returns Analysis
The assumptions used in conducting cost and returns analysis of improved native
garlic were based on the technical and economic data provided by Dr. Helen
Castaeda, the developer of improved native garlic from the Department of Agriculture
Regional Field Unit in Region 1 (DA RFU 1) Ilocos Integrated Agriculture Research
Center (ILIARC).
Appendix Table B.1. Annual production per hectare and selling price of
improved native garlic, Ilocos Region, 2016
Annual Production/Hectare (kg/ha) Selling Price (PhP/kg)
6,140 150.00
Appendix Table B.2. Material input use per hectare in improved native garlic
production and input prices, Ilocos Region, 2016
Material Input Item Unit Quantity Price/Unit (PhP)
Seeds Kg 400 80.00
Rice hay Truckload 10 1000.00
Vital N 100-g pack 1 450.00
Vermicompost 50-kg bag 5 250.00
Fertilizers
14-14-14 50-kg sack 3 1,200.00
16-20-0 50-kg sack 2 900.00
21-0-0 50-kg sack 6 580.00
0-0-60 50-kg sack 1 1,700.00
Berelex Piece 4 100.00
Dithane M 45 Kilogram 1 350.00
Foliar /Greebee 2 Bottle 2 180.00
Gasoline Liter 64 26.00
Oil Liter 1 240.00
69
Appendix Table B.3. Estimated labor use per hectare in improved native garlic
production by farm operation and daily wage rate, Ilocos
Region, 2016
Daily Wage Rate
Farm Operation No. of Man-days
(PhP)
Seed pieces preparation 8.00 250.00
Basal fertilizer application/mulching 12.00 250.00
Planting 25.00 250.00
Fertilizer application 2.00 250.00
Foliar fertilizer application 4.00 250.00
Weed management 20.00 250.00
Irrigation 24.29 250.00
Harvesting 24.00 250.00
Drying/cleaning 36.57 250.00
Bundling/sorting 10.29 250.00
Total 166.15
Note: Most farmers practice minimum/zero tillage
2. Copy the data from Appendix Table 1, Appendix Table 2, Appendix Table 3,
Appendix Table 4 and Appendix Table 5 to the Production worksheet, Material
Inputs worksheet, Labor worksheet, Other Costs worksheet, and Fixed Capital
Investment worksheet, respectively.
3. Under the Production worksheet, compute annual gross income from the sales
of improved native garlic (column D, row 4) by multiplying annual native garlic
70
production (column B, row 4) by the selling price of native garlic (column C, row
4).
To compute annual gross income, move the cursor to column D, row 4 (Annual
Gross Income column, improved native garlic row), press the = sign in the key
pad, then move the cursor to column B, row 4 (Annual Production/Hectare
column, Improved native garlic row), press the * sign in the key pad, and finally
move the cursor to column C, row 4 (Selling Price column, Improved native
garlic row), then press enter in the key pad. In Excel software program, * means
multiply.
4. Under the Material Costs worksheet, compute cost of each material input by
multiplying the quantity of material input used by its unit price.
To compute the annual cost of seeds, move the cursor to column E, row 4
(Annual Material Input Cost column, Seeds row), press the = sign in the key
pad and then move the cursor to column C, row 4 (Quantity column, Seeds
row). Press the * sign in the key pad, and move the cursor to column D, row 4
(Price/Unit column, Seeds row), and finally press enter in the key pad. To
compute the annual costs of other material inputs, move the cursor to column
E, row 5 (Annual Material Input Cost column, Seeds row), then click copy in the
tool bar and move the cursor down from column E, row 5 up to column E, row
17. Then click paste in the tool bar. Add all the estimated annual material input
costs by moving the cursor to column E, row 18 (Annual Material Input Cost
column, Total row), then click formula in the tool bar, click , move the cursor
to column E, row 4 down to column E, row 17 and press enter in the key pad.
71
5. Under the Labor Costs worksheet, compute the annual labor cost for each farm
operation by multiplying annual labor use in man-days by the daily wage rate
for each farm operation.
To compute the annual labor cost in seed preparation, move the cursor to
column D, row 4 (Annual Labor Cost column, Seed preparation row), press the
= sign in the key pad, move the cursor to column B, row 4 (No. of Man-days
column, Seed preparation row). Press the * sign in the key pad, and move the
cursor to column C, row 4 (Daily Wage Rate column, Seed preparation row),
and then press enter. To compute the annual labor costs for other farm
operations, move the cursor to column D, row 4 (Annual Labor Cost column,
Seed preparation row), then click copy in the tool bar and move the cursor
down from column D, row 5 up to column D, row 13. Then click paste in the
tool bar. Add the estimated annual labor costs for all farm operations by moving
the cursor to column D, row 14 (Annual Labor Cost column, Total row), then
click formula in the tool bar, click , move the cursor to column D, row 4 down
to column D, row 13 and press enter in the tool bar.
72
6. Under the Other Costs worksheet, compute total other operating costs. Move
the cursor to column B, row 8 (Annual Cost column, Total row), then click
formula in the tool bar, click , move the cursor to column B, row 5 down to
column D, row 6 and press enter in the key pad.
7. Under Fixed Capital Investment worksheet, compute the total land purchase
cost by multiplying the purchase cost per square meter by land area in square
meters. Under column F, row 4 (Total Purchase Cost column, Land row), press
the = sign in the key pad, move the cursor to column B, row 4 (Quantity column,
Land row), press the * sign in the key pad, move the cursor to column E, row 4
(Purchase Cost/Unit column, Land row), and then press enter in the key pad.
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To compute the total purchase cost of other fixed capital investment items,
move the cursor to column F, row 4 (Total Purchase Cost column, Water pump
row), then click copy in the tool bar and move the cursor down from column F,
row 5 up to column F, row 7, and then click paste in the tool bar. Add the
estimated costs of all the fixed capital investment items by moving the cursor
to column F, row 8 (Total Purchase Cost column, Total row), then click formula
in the tool bar, click , move the cursor to column F, row 5 down to column F,
row 7 and press enter in the key pad.
74
To compute the annual depreciation of other fixed capital investment items,
move the cursor to column G, row 5 (Annual Depreciation column, Water pump
row), then click copy in the tool bar, move the cursor down from column G, row
6 up to column G, row 7, and click paste in the tool bar. Add the estimated
annual depreciation of all the fixed capital investment items by moving the
cursor to column G, row 8 (Annual Depreciation column, Total row), then click
formula in the tool bar, click , move the cursor to column G, row 4 down to
column G, row 7 and press enter in the key pad.
9. Add or create two columns in the Fixed Capital Investment worksheet, namely:
Beginning Capital Inventory and Ending Capital Inventory. Take note that the
cost figures for all fixed capital investment items under the beginning capital
inventory column (Column H) are the same as their purchase costs. Move the
cursor to column H, row 4 (Beginning Capital Inventory Column, land row),
press the = sign, move the cursor to column F, row 4 (Total Purchase Cost
column, Land row), and then press enter in the key pad. To determine the
beginning inventory of other fixed capital investment items, move the cursor to
column H, row 4 (Beginning Capital Inventory Column, Land row), click copy in
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the tool bar, move the cursor to column H, row 5 down to column H, row 7, and
the press enter in the key pad. Compute the total beginning capital inventory,
by moving the cursor to column H, row 8, clicking formula in the tool bar,
clicking , moving the cursor from column H, row 4 down to column H, row 7,
and then pressing enter in the worksheet.
To compute the ending capital inventory of each capital item except land,
subtract annual depreciation from the beginning capital inventory. Since land
does not depreciate, the beginning capital inventory is the same as the ending
capital inventory. With regard to the ending capital inventory of water pump,
move the cursor to column I, row 5 (Ending Capital Inventory Column, Water
pump row), press the = sign, move the cursor to column H, row 5 (Beginning
Capital Inventory column, Water pump row), press the sign in the key pad,
move the cursor to column G, row 5 (Annual Depreciation, Water pump row).
To compute the ending capital inventory of other fixed capital investment items,
move the cursor to column I, row 5 (Ending Capital Inventory column, Water
pump row), then click copy in the tool bar, move the cursor down from column
I, row 6 up to column I, row 7, and click paste in the tool bar. Add the estimated
ending capital inventory of all the fixed capital investment items by moving the
cursor to column I, row 8 (Ending Capital Inventory column, Total row), then
click formula in the tool bar, click , move the cursor to column I, row 4 down
to column I, row 7 and press enter in the key pad.
76
Compute the average capital inventory by adding the beginning capital
inventory and the ending capital inventory and then dividing by 2. Move the
cursor to column F, row 9 in the Fixed Capital Investment worksheet, press the
= sign in the key pad, press the open parenthesis sign or (in the key pad, move
the cursor to column H, row 8 (Beginning Capital Inventory column, Total row),
press the + sign in the key pad, move the cursor to column I, row 8 (Ending
Capital Inventory column, Total row), press the close parenthesis sign or ) in
the key pad, press the / sign in the key pad, press 2 in the key pad, and finally
press enter in the key pad.
77
10. Under the Cost and Returns worksheet, input the gross income figure by linking
to the Production worksheet. Under the Cost and Returns worksheet, move the
cursor to column B, row 5 (Amount column, Improved native garlic sales row),
press the = sign in the key pad, then move the cursor to column D, row 4
(Annual Gross Income column, Improved native garlic row) in the Production
worksheet and press enter in the key pad. To compute total gross income in
the Cost and Returns table, move the cursor to column B, row 6 (Amount
column, Total Gross Income row), press the = sign in the key pad, then move
the cursor to column B, row 5 (Amount column, Improved native garlic sales
row) and press enter in the key pad.
To input the seed cost figure under variable costs in the Cost and Returns
worksheet, move the cursor to column B, row 9 (Amount column, Seeds row),
press the = sign in the key pad, then move the cursor to column E, row 4
(Material Input Cost column, Seeds row) in the Material Costs worksheet and
press enter in the key pad.
To input the rice hay cost figure, vital N cost figure, and vermicompost cost
figure in column B, row 10, column B, row 11, and column B, row 12,
respectively in the Cost and Returns worksheet, move the cursor to column B,
row 9 (Amount column, Seeds row), click copy in the tool bar, then move the
cursor down from column B, row 10 to column B, row 12 and press enter in the
key pad.
78
To input the fertilizer cost figure, which includes 14-14-14, 16-20-0, 21-0-0, and
0-0-60, in the Cost and Returns worksheet, move the cursor to column B, row
13 (Amount column, Fertilizers row), press the = sign, type SUM(, go to Material
Costs worksheet, move the cursor from column E, row 9 to column E, row 12,
then type ), and finally, press enter in the key pad.
To input the Berelex cost figure under variable costs, move the cursor to
column B, row 14 (Amount column, Berelex row), press the = sign in the key
pad, then move the cursor to column E, row 13 (Material Input Cost column,
Berelex row) in the Material Costs worksheet and press enter in the key pad.
To input the Dithane M5 cost figure and Greenbee 2 cost figure in column B,
row 15, and column B, row 16, respectively, move the cursor to column B, row
14 (Amount column, Berelex row), click copy in the tool bar, then move the
cursor down from column B, row 15 up to column B, row 16 and press enter in
the key pad.
79
To input the gasoline and oil cost figure under variable costs, move the cursor
to column B, row 17 (Amount column, Gasoline and oil row), press the = sign
in the key pad, then move the cursor to column E column, row 16 in the Material
Costs worksheet, press the + sign in the key pad, move the cursor to column
E, row 17 in the same worksheet, and then press enter in the key pad.
To input the labor cost figure under variable costs, move the cursor to column
B, row 18 (Amount column, Labor row), press the = sign in the key pad, then
move the cursor to column D, row 14 (Annual Labor Cost column, Total row) in
the Labor Costs worksheet and press enter in the key pad.
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Compute interest on variable costs by multiplying the sum of all the estimated
variable cost items by 0.22. It was assumed that the interest rate on borrowed
capital is 22% per year. To compute the interest on variable costs, move the
cursor to column B, row 19 (Amount column, Interest on variable costs row),
press the = sign in the key pad, type SUM(, move the cursor from column B,
row 9 to column B, row 18, and then type ). Press the * sign in the key pad and
then type 0.22. Press enter in the key pad.
Under the Cost and Returns worksheet, compute total variable cost. Move the
cursor to column B, row 20 (Amount column, Total variable cost row), press the
= sign in the key pad, click formula in the tool bar, click , move the cursor to
column B, row 9 down to column B, row 19, and press enter in the key pad.
81
To input the cost figure for tractor service under fixed costs in the Cost and
Returns worksheet, move the cursor to column B, row 23 (Amount column,
Tractor service row), press the = sign in the key pad, then move the cursor to
column B, row 5 (Annual Cost column, Tractor service row) in the Other Costs
worksheet and press enter in the key pad.
To input the land rental cost figure under fixed costs in the Cost and Returns
worksheet, move the cursor to column B, row 24 (Amount column, Land rent
row), press the = sign in the key pad, then move the cursor to column B, row 6
(Annual Cost column, Land rent row) in the Other Costs worksheet and press
enter in the key pad.
To input the annual depreciation cost figure under fixed costs in the Cost and
Returns worksheet, move the cursor to column B, row 25 (Amount column,
Depreciation row), press the = sign in the key pad, then move the cursor to
column G, row 8 (Annual Depreciation column, Total row) in the Fixed Capital
Investment worksheet and press enter in the key pad.
Under the Cost and Returns worksheet, compute total fixed cost. Move the
cursor to column B, row 26 (Amount column, Total fixed cost row), press the =
sign in the key pad, click formula in the tool bar, click , move the cursor to
column B, row 23 down to column B, row 25, and press enter in the key pad.
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Under the Cost and Returns worksheet, compute total cost. Move the cursor to
column B row 28 (Amount column, Total cost row), press the = sign in the key
pad, move the cursor to column B, row 20 (Amount column, Total variable cost
row), press the + sign in the key pad, move the cursor to column B, row 26
(Amount column, Total fixed cost row) and press enter in the key pad.
83
Under the Cost and Returns worksheet, compute gross margin by subtracting
total variable costs from gross income. Move the cursor to column B, row 29
(Amount column, Gross margin row), press the = sign in the key pad, move the
cursor to column B, row 6 (Amount column, Total gross income row), press the
sign in the key pad, move the cursor to column B, row 20 (Amount column,
Total variable cost row), and press enter in the key pad.
Under the Cost and Returns worksheet, compute net income by subtracting
total cost from gross income. Move the cursor to column B, row 30 (Amount
column, Net income row), press the = in the key pad, move the cursor to column
B, row 6 (Amount column, Gross income row), press the sign in the key pad,
move the cursor to column B, row 28 (Amount column, Total cost row), and
press enter in the key pad.
84
Under the Cost and Returns worksheet, compute net income per kilogram by
dividing net income by annual improved native garlic production in kilograms.
Move the cursor to column B, row 31 (Amount column, Net income/kg row),
press the = in the key pad, move the cursor to column B, row 30 (Amount
column, Net income row), press the / sign (meaning divide) in the key pad,
move the cursor to column B, row 4 (Annual Production column, Improved
native garlic row) in the Production worksheet, and press enter in the key pad.
Under the Cost and Returns worksheet, compute adjusted net income by
adding back interest on variable costs or operating costs to net income. Move
the cursor to column B, row 32 (Amount column, Adjusted net income row),
press the = sign in the key pad, move the cursor to column B, row 30 (Amount
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column, Net income row), press the + sign in the key pad, move the cursor to
column B, row 19 (Amount column, Interest on variable costs row), and press
enter in the key pad.
Under the Cost and Returns worksheet, compute return to capital. In this
example, the return to capital is the same as the adjusted net income because
it is assumed that the only source of farm labor is hired labor. If the farmer is
directly involved in farm activities, the opportunity cost of his/her labor will be
deducted from adjusted net income to derive the return to capital. Move the
cursor to column B, row 32 (Amount column, return to capital row), press the =
in the key pad, move the cursor to column B, row 32, and press enter in the
key pad.
Compute rate of return to capital (in %) in the Cost and Returns Worksheet by
dividing return to capital by the average on fixed capital inventory and then
multiplying by 100. Move the cursor to column B, row 34 (Amount column, Rate
of return to capital row), press the = sign, then move the cursor to column B,
row 33 (Amount column, Return to capital row), press the / sign, move the
cursor to column F, row 9 in the Fixed Capital Investment worksheet, press *
in the key pad, type100, and press enter in the key pad.
86
11. Conduct break-even analysis by computing the break-even price and break-
even yield. To compute break-even price, divide total cost by annual production
of improved native garlic. Move the cursor to column B, row 39 (Amount
column, Break-even price row), press the = sign, then move the cursor to
column B, row 28 (Amount column, Total cost row) in the Cost and Returns
worksheet, press the / sign, then move the cursor to column B, row 4 (Annual
Production column, Improved native garlic row) in the Production worksheet
and press enter in the key pad.
To compute break-even yield, divide total cost by the selling price of improved
native garlic. Move the cursor to column B, row 40 (Amount column, Break-
even price row), press the = sign, then move the cursor to column B, row 28
(Amount column, Total cost row) in the Cost and Returns worksheet, press the
/ sign, then move the cursor to column C, row 4 (Selling Price column, Improved
native garlic row) in the Production worksheet and press enter in the key pad.
87
88
APPENDIX C
COST AND RETURNS ANALYSIS OF
UBI POWDER ENTERPRISE
A. Assumptions Used in Cost and Return Analysis
The assumptions used in conducting cost and returns analysis of ubi powder were
based on the technical and economic data provided by the Department of
Agriculture-Bureau of Agricultural Research. The technology developer of ubi
powder is Dr. Teodora M. De Villa from the Food Science Cluster, College of
Agriculture, University of the Philippines Los Baos. The cost and returns analysis
of the ubi powder enterprise in this training manual is for one-year of operation
only.
Appendix Table C.1. Annual production and selling price of ubi powder, Laguna,
2008
Daily Monthly Annual Selling
Productiona Productionb Productionc Price
(Pack) (Pack) (Pack) (PhP/pack)
1,000 22,000 176,000 40.00
a
One kilogram of fresh ubi yields approximately 0.17 kilogram of ubi powder.
b
22 working days per month
c
8 months of operation per year or 176 days of operation per year
Appendix Table C.2. Raw material and packaging materials in ubi powder
processing and buying prices, Laguna, 2008
Type of Raw and Daily Monthly Annual
Cost Per Unit
Packaging Unit Require- Require- Require-
(PhP/ Unit)
Materials ment ment ment
Ubi (raw) kg 588 12,936 103,488 11
Packaging
materials
Primary kg 1.9 41.8 334.4 100
Secondary box 1,000 22,000 176,000 3
89
Appendix Table C.3. Estimated labor requirements and wages/salaries in ubi
powder processing, Laguna, 2008
Daily Monthly
Daily Monthly Annual
No. of Wage Salary
Position Labor Labor Labor (PhP/
Workers (PhP/
(md) (md) (md) month)
md)
Direct labora 10 10 220 1,760 250
Administrative
Plant managera 1 1 22 176 12,540
a 1 1 22 176 5,500
Clerk-typist
a 1 1 22 176 6,600
Driver-mechanic
a 1 1 22 176 5,500
Utility worker
Driver for 1 1 16 128 250
product
Distributionb
a
Assumed 176 man-days of labor per year for 8 months of operation per year
b
Driver for distribution refers to labor in hauling, loading, and delivering products to
target buyers at 128 hauling/distributions per year
Note: Direct labor and driver for product distribution are paid on a daily basis; the
rest are paid on a monthly basis
90
Appendix Table C.5. Repair and maintenance expenses in ubi powder
processing, Laguna, 2008
Repair and Maintenance Cost Annual Cost Repairs and Maintenance
Item (PhP) Cost (PhP)
Buildinga 1,500,000.00 75,000.00
Equipmentb 2,806,900.00 280,690.00
Vehiclec 375,000.00 7,500.00
a
5% of acquisition cost
b
10% of acquisition cost
c
2% of acquisition cost
Appendix Table C.6. Imputed land charge in ubi powder processing, Laguna,
2008
Cost Item Annual Cost (PhP)
Land chargea 14,000.00
a
Land purchase cost (PhP220,000) multiplied by the interest on long-term savings
(i.e., one-year time deposit of 7% per year)
Appendix Table C.7. Fixed capital investment in ubi powder processing, Laguna,
2008
Cost/Unit
Fixed Capital Investment Item Quantity Unit Useful Life (Years)
(PhP)
1,000.00
Land 200 sq.m.
15,000.00
Building 100 sq.m 20
375,000.00
Delivery van 1 unit 10
Plant equipment
Weighing scale, digital:
25,000.00
Top loading, 100-kg. capacity. 1 unit 10
1 unit 10 1,500.00
10-kg capacity
1 unit 10 5,000.00
1-kg capacity
120,000.00
Pressure cooker, 80-qts capacity 5 unit 10
150,000.00
Feather Mill grinder, 3.5 hp 1 unit 10
500,0000.00
Cabinet drier, 250 kg. capacity 3 unit 10
unit 10 20,000.00
Pulverizer, 100 kg/hr 1
unit 10 30,000.00
Heat sealer, automatic 1
unit 5 15,000.00
Electric /Gas Stove 5
unit 10 4,000.00
Gas tank, with hose 1
set 5 1,000.00
Stainless steel knives 1
unit 10 30,000.00
Stainless steel working table 2
unit 6,000.00
Water hose, pressurized 1 5
unit 1,200.00
Stainless steel, mixing bowl 2 10
unit 8,000.00
Exhaust fan 3 5
unit 5,000.00
Timer 1 10
unit 1,500.00
Crates (plastic, heavy duty) 12 10
Laboratory Equipment
Moisture meter 1 unit 10 80,000.00
91
Appendix Table C.7. Continued.
Cost/Unit
Fixed Capital Investment Item Quantity Unit Useful Life (Years)
(PhP)
Office Equipment
Air conditioning unit, 2 hp 1 unit 10 25,000.00
Refrigerator, 10 cu. ft. 1 unit 10 20,000.00
Computer/Printer and accessories 1 unit 5 50,000.00
Computer table with chair 1 set 10 5,000.00
Wall clocks 2 unit 5 1,000.00
Office table 2 unit 10 5,000.00
Office chairs 6 unit 10 1,000.00
Filing Cabinet 1 unit 10 10,000.00
Bundy clock 1 unit 10 18,000.00
Electric Standard fan 2 unit 10 2,000.00
2. Copy the data from Appendix Table C.1, Appendix Table C. 2, Appendix Table
C.3, Appendix Table C.4, Appendix Table C.5, Appendix Table C.6, and
Appendix Table C.7 to the Production worksheet, Raw & Packaging Material
Costs worksheet, Labor Costs worksheet, Other Operating and Administrative
Costs worksheet, Repairs & Maintenance Costs worksheet, Land Charge
worksheet, and Fixed Capital Investment worksheet, respectively.
92
4. Under the Raw and Packaging Material Costs worksheet, compute the cost of
each raw and packaging material input by multiplying the quantity of raw or
packaging material used by its unit price.
To compute the annual cost of raw material (i.e., ubi) used, move the cursor to
column G, row 6 (Total Annual Cost column, Ubi row), press the = sign in the
key pad and then move the cursor to column E, row 6 (Annual Requirement
column, Ubi row). Press the * sign in the key pad, and move the cursor to
column F, row 6 (Cost Per Unit column, Ubi row), and finally press enter in the
key pad. To compute the annual costs of the primary and secondary packaging
materials, move the cursor to column G, row 6 (Total Annual Cost column, Ubi
row), then click copy in the tool bar and move the cursor down from column G,
93
row 8 up to column G, row 9. Then click paste in the tool bar. Add all the
estimated annual raw and packaging material costs by moving the cursor to
column G, row 11 (Total Annual Cost column, Total row), then click formula in
the tool bar, click , move the cursor to column G, row 6 down to column G,
row 10 and press enter in the key pad.
94
5. Under the Labor Costs worksheet, compute annual labor cost for direct labor
and for hiring a driver for product distribution by multiplying annual labor use in
man-days by the daily wage rate.
To compute the direct labor cost, move the cursor to column H, row 5 (Annual
Labor Cost column, direct labor row), press the = sign in the key pad, move the
cursor to column E, row 5 (Annual Labor Use column, Direct Labor row). Press
the * sign in the key pad, then move the cursor to column F, row 5 (Daily Wage
column, direct labor row) and press enter in the key pad. To compute the
annual labor cost for hiring a driver for product distribution, move the cursor to
column H, row 11 (Annual Labor Cost column, Driver for product distribution
row), press the = sign in the key pad, move the cursor to column E, row 11
(Annual Labor Use column, Driver for product distribution row). Press the * sign
in the key pad, then move the cursor to column F, row 11 (Daily Wage column,
Driver for product distribution row) and press enter in the key pad.
95
To compute the annual labor cost for each administrative personnel who is paid
monthly, multiply the number of worker hired by the monthly salary and multiply
again by 8 since there are 8 months of ubi powder processing operation per
year. For example, to compute the annual labor cost of hiring a plant manager,
move the cursor to column H, row 7 (Annual Labor Cost column, Plant manager
row), press the = sign in the key pad, move the cursor to column B, row 7
(Number of Workers column, Plant manager row), press the * sign in the key
pad, and move the cursor to column G, row 7 (Monthly Salary column, Plant
manager row), press the * sign in the key pad, press 8 in the key pad, and
finally press enter in the key pad. To compute the annual labor cost of hiring
other administrative personnel (i.e., clerk-typist, driver-mechanic, and utility
worker) who are paid monthly, move the cursor to column H, row 7 (Annual
Labor Cost column, Plant manager row), then click copy in the tool bar and
move the cursor down from column H, row 8 up to column H, row 10. Then
click paste in the tool bar.
Under total row, add the direct labor cost and the administrative labor costs by
moving the cursor to column H, row 13 (Annual Labor Cost column, total row),
typing SUM(, moving the cursor from column H, row 5 to column H, row 12,
typing ), and then pressing enter in the key pad.
96
6. Under the Other Operating and Administrative Costs worksheet, compute the
total other operating, overhead, and business costs. To compute annual cost
of fuel and oil used, move the cursor to column E, row 5 (Total Cost column,
Fuel and oil row), press the = sign in the key pad and then move the cursor to
column B, row 5 (Quantity column, Fuel and oil row). Press the * sign in the key
pad, then move the cursor to column D, row 5 (Cost Per column, fuel and oil
row) and press enter in the key pad. To compute the annual costs of utilities
(i.e., electricity and water), move the cursor to column E, row 5 (Total Cost
column, fuel and oil row), then click copy in the tool bar and move the cursor
down from column E, row 6 (Total Cost column, Electricity row) up to column
E, row 7 (Total Cost column, Water charge row). Then click paste in the tool
bar.
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To compute the cost of insurance, multiply the total fixed capital investment by
2%. To compute the annual insurance cost, move the cursor to column E, row
9 (Total Cost column, Insurance row), press the = sign in the key pad, move
the cursor to column F, row 41 (Total Purchase Cost column, Total row) in the
Fixed Capital Investment worksheet, press the * sign in the key pad, type 0.02
and press enter in the key pad.
To compute the the cost of market promotion, multiply the annual gross
income/sales by 2%. To compute the market promotion cost, move the cursor
to column E, row 12 (Total Cost column, Market promotion row), press the =
sign in the key pad, move the cursor to column E, row 5 (Annual Gross
Income/Sales column, row 5) in the Production worksheet, press the * sign in
the key pad, type 0.02 and press enter in the key pad.
98
Compute the total other operating, business and administrative costs. Move
the cursor to column E, row 15 (Total Cost column, Total row), press the = sign
in the key pad, type SUM(, move the cursor from column E, row 5 to column E,
row 12, type , (comma), move the cursor to column E, row 14, type ) and press
enter in the key pad.
99
7. Under the Repairs and Maintenance Costs worksheet, compute the building
repairs and maintenance cost by moving the cursor to column C row 5 (Repairs
& Maintenance Cost column, Building row), pressing the = sign in the key pad,
typing 0.05, pressing the * sign in the key pad, then moving the cursor to
column B, row 5 (Total Cost column, Building row) and pressing enter in the
key pad. It is assumed that the annual repairs and maintenance cost of the
processing building is 5% of the total cost of the building.
To compute the equipment repairs and maintenance cost, move the cursor to
column C row 6 (Repairs & Maintenance Cost column, Equipment row), press
the = sign in the key pad, type 0.10, press the * sign in the key pad, then move
the cursor to column B, row 6 (Total Cost column, Equipment row) and press
enter in the key pad. It is assumed that the annual equipment repairs and
maintenance cost is 10% of the total cost of equipment.
100
To compute the vehicle repairs and maintenance cost, move the cursor to
column C row 7 (Repairs & Maintenance Cost column, Vehicle row), press the
= sign in the key pad, type 0.02, then move cursor to column B, row 7 (Total
Cost column, Vehicle row), and press enter in the key pad. It is assumed that
the repairs and maintenance cost of the vehicle is 2% of the total cost of the
vehicle.
To compute the total repairs and maintenance cost, move the cursor to column
C, row 8 (Repairs and Maintenance Cost column, total row), then click formula
in the tool bar, click , move the cursor to column C, row 5 down to column C,
row 7, and press enter in the key pad.
8. Under the Land Charge worksheet, move the cursor to column B, row 5, press
the = sign in the key pad, open the Fixed Capital Investment worksheet, move
the cursor to column F, row 5 (Total Cost column, land row), press the * sign in
the key pad, type 0.07, then press enter in the key pad. It is assumed that the
interest on one-year time deposit is 7%.
101
9. Under Fixed Capital Investment worksheet, compute the total land cost by
multiplying cost per square meter by the land area in square meters. Under
column F, row 4 (Total Purchase Cost column, Land row), press the = sign in
the key pad, move the cursor to column B, row 4 (Quantity column, Land row),
press the * sign in the key pad, then move the cursor to column E, row 5
(Purchase Cost Per Unit column, Land row) and press enter in the key pad.
To compute the total purchase cost of other fixed capital investment items used
in ubi powder processing, move the cursor to column F, row 5 (Total Purchase
Cost column, Land row), then click copy in the tool bar and move the cursor
down from column F, row 5 up to column F, row 27, and then click paste in the
tool bar. Compute the sub-total row (i.e., row 28) consisting of land, building,
delivery van, plant equipment, and laboratory equipment) by moving the cursor
to column F, row 28 (Total Purchase Cost column, Sub-total row), then clicking
formula in the tool bar, clicking , moving the cursor to column F, row 4 down
to column F, row 27 and pressing enter in the key pad.
102
Under office equipment in the Fixed Capital Investment worksheet, compute
the total purchase cost of the air conditioning unit by multiplying the quantity by
the purchase cost per unit. This is done by moving the cursor to column F, row
30 (Total Purchase Cost column, Air conditioning unit row), pressing the = sign
in the key pad, moving the cursor to column B, row 30 (Quantity column, Air
conditioning row), pressing the * sign in the key pad, then moving the cursor to
column E, row 30 (Purchase Cost Per Unit column, Air conditioning unit row)
and pressing enter in the key pad.
To compute the total cost of other office equipment, move the cursor to column
F, row 30 (Total Purchase Cost column, Air conditioning unit row), then click
copy in the tool bar and move the cursor down from column F, row 31 up to
column F, row 39, and then click paste in the tool bar. Compute the sub-total
row (i.e., row 40) for all office equipment by moving the cursor to column F, row
40 (Total Purchase Cost column, Sub-total row), then clicking formula in the
tool bar, clicking , moving the cursor to column F, row 30 (Total Purchase
Cost column, Air conditioning unit row) down to column F, row 39 (Total
103
Purchase Cost column, Electric standard fan row) and then pressing enter in
the key pad.
Compute the total purchase cost of all the fixed capital investment items by
adding the sub-total of the fixed capital items used in ubi powder processing
and the sub-total of all the office equipment. Move the cursor to column F, row
41 (Total Purchase Cost column, Total row), press the = sign in the key pad,
move the cursor to column F, row 28 (Total Purchase Cost column, Sub-total
row), press the + sign in the key pad, then move the cursor to column F, row
40 (Total Purchase Cost Column, Sub-total row), and press enter in the key
pad.
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To compute the annual depreciation of other fixed capital investment items
used in processing ubi powder, move the cursor to column G, row 5 (Annual
Depreciation column, Building row), then click copy in the tool bar, move the
cursor down from column G, row 6 (Annual depreciation column, Delivery van
row) down to column G, row 27 (Annual Depreciation column, Moisture meter
row), and click paste in the tool bar. Add the estimated annual depreciation of
all the fixed capital investment items used in ubi powder processing by moving
the cursor to column G, row 28 (Annual Depreciation, Sub-total row), then
clicking formula in the tool bar, clicking , moving the cursor to column G, row
5 down to column G, row 27 and finally pressing enter in the key pad.
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Under office equipment in the Fixed Capital Investment worksheet, compute
the annual depreciation of the air conditioning unit. Move the cursor to column
G, row 30 (Annual Depreciation column, Air conditioning unit row), press the =
sign in the key pad, move the cursor to column F, row 30 (Total Purchase Cost
column, Air conditioning unit row), press the / sign in the key pad, then move
the cursor to column D, row 30 (Useful life column, Air conditioning unit row)
and press enter in the key pad.
To compute the annual depreciation of other office equipment, move the cursor
to column G, row 30 (Annual Depreciation column, Air conditioning unit row),
then click copy in the tool bar, move the cursor down from column G, row 31
(Annual depreciation column, Refrigerator row) down to column G, row 39
(Annual Depreciation column, Electric standard fan row), and click paste in the
tool bar. Add the estimated annual depreciation of all the office equipment
items by moving the cursor to column G, row 41 (Annual Depreciation, sub-
total row), then click formula in the tool bar, click , move the cursor to column
G, row 31 down to column G, row 40 and press enter in the key pad.
Compute the total depreciation of all the fixed capital investment items by
moving the cursor to column G, row 41 (Annual Depreciation column, Total
row), pressing the = sign in the key pad, moving the cursor to column G, row
28 (Annual Depreciation column, Sub-total row), pressing the + sign in the key
pad, moving the cursor to column G, row 40 (Annual Depreciation column, Sub-
total row) and then pressing enter in the key pad.
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10. Add or create two columns in the Fixed Capital Investment worksheet, namely:
Beginning Capital Inventory and Ending Capital Inventory. Take note that the
cost figures for all the fixed capital investment items under the beginning capital
inventory column (Column H) are the same as their purchase costs (F). Move
the cursor to column H, row 4 (Beginning Capital Inventory column, land row),
press the = sign, move the cursor to column F, row 4 (Total Purchase Cost
column, Land row), and then press enter in the key pad. To determine the
beginning inventory value of other fixed capital investment items, move the
cursor to column H, row 4 (Beginning Capital Inventory Column, Land row),
click copy in the tool bar, move the cursor to column H, row 5 down to column
H, row 27, and then press enter in the key pad. Compute the sub-total for the
beginning capital inventory of all the fixed capital items used in ubi powder
processing by moving the cursor to column H, row 28 (Beginning Capital
Inventory column, Sub-total row), clicking formula in the tool bar, clicking ,
moving the cursor from column H, row 4 down to column H, row 27 and then
pressing enter in the key pad.
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To determine the beginning inventory value of the air conditioning unit under
office equipment in the Fixed Capital Investment worksheet, move the cursor
to column H, row 30 (Beginning Capital Inventory Column, Air conditioning unit
row), press the = sign in the key pad, then move the cursor to column F, row
30 (Total Purchase Cost column, Air conditioning row) and press enter in the
key pad. To determine the beginning inventory of other office equipment, move
the cursor to column H, row 30 (Beginning Capital Inventory column, Air
conditioning unit row), click copy in the tool bar, then move the cursor to column
H, row 31 (Beginning Capital Inventory column, Refrigerator row) down to
column H, row 39 (Beginning Capital Inventory column, Electric standard fan
row) and press enter in the key pad. Compute the sub-total for the beginning
capital inventory of all office equipment by moving the cursor to column H, row
40 (Beginning Capital Inventory column, Sub-total row), clicking formula in the
tool bar, clicking , then moving the cursor from column H, row 30 down to
column H, row 40 and pressing enter in the key pad.
108
Compute the total beginning capital inventory of all the fixed capital investment
items by moving the cursor to column H, row 41 (Beginning Capital Inventory
column, Total row), pressing the = sign in the key pad, moving the cursor to
column H, row 28 (Beginning Capital Inventory column, Sub-total row),
pressing the + sign in the key pad, then moving the cursor to column H, row 40
(Beginning Capital Inventory column, Sub-total row) and pressing enter in the
key pad.
To compute the ending capital inventory of each capital item except land,
subtract annual depreciation from the beginning capital inventory. Since land
does not depreciate, the ending capital inventory (column I, row 4) is the same
as the beginning capital inventory (column H, row 4). With regard to the ending
capital inventory of building, move the cursor to column I, row 5 (Ending Capital
Inventory column, Building row), press the = sign in the key pad, move the
cursor to column H, row 5 (Beginning Capital Inventory column, Building row),
press the sign in the key pad, then move the cursor to column G, row 5
(Annual Depreciation, Building row) and press enter in the key pad. To compute
the ending capital inventory of other fixed capital items used in ubi powder
processing, move the cursor to column I, row 5 (Ending Capital Inventory
column, Building row), then click copy in the tool bar, move the cursor down
from column I, row 6 up to column I, row 27, and click paste in the tool bar.
Compute the sub-total for the ending capital inventory of fixed capital
investment items used in ubi powder processing, by moving the cursor to
column I, row 28 (Ending Capital Inventory column, Sub-total row), clicking
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formula in the tool bar, clicking , then moving the cursor from column I, row 4
down to column H, row 27 and then pressing enter in the key pad.
To determine the ending inventory value of the air conditioning unit under office
equipment in the Fixed Capital Investment worksheet, move the cursor to
column I, row 30 (Ending Capital Inventory column, Air conditioning unit row),
press the sign in the key pad, move the cursor to column G, row 30 (Annual
Depreciation, Air conditioning unit row), and press enter in the key pad. To
compute the ending capital inventory of other office equipment, move the
cursor to column I, row 30 (Ending Capital Inventory column, Air conditioning
unit row), then click copy in the tool bar, then move the cursor down from
column I, row 31 up to column I, row 39 and click paste in the tool bar. Compute
the sub-total for the ending capital inventory of office equipment by moving the
cursor to column I, row 40 (Ending Capital Inventory column, Sub-total row),
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clicking formula in the tool bar, clicking , then moving the cursor from column
I, row 30 down to column H, row 39, and pressing enter in the key pad.
Compute the total ending capital inventory of all the fixed capital investment
items by moving cursor to column I, row 41 (Ending Capital Inventory column,
Total row), pressing the = sign in the key pad, moving the cursor to column I,
row 28 (Ending Capital Inventory column, Sub-total row), pressing the + sign in
the key pad, then moving the cursor to column I, row 40 (Ending Capital
Inventory column, Sub-total row) and pressing enter in the key pad.
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11. Under the Cost and Returns worksheet, input ubi powder sales figure by linking
to the Production worksheet. Under the Cost and Returns worksheet, move the
cursor to column B, row 5 (Amount column, Ubi powder sales row), press the
= sign in the key pad, then move the cursor to column E, row 5 (Annual Gross
Income/Sales column, row 5) in the Production worksheet and press enter in
the key pad. To compute total gross income in the Cost and Returns table,
move the cursor to column B, row 6 (Amount column, Total Gross Income row),
press the = sign in the key pad, then move the cursor to column B, row 5
(Amount column, ubi powder sales row) and press enter in the key pad.
To input the cost figure for raw ubi under variable costs, move the cursor to
column B, row 9 (Amount column, Ubi (raw) row), press the = sign in the key
pad, then move the cursor to column B, row 6 (Total Annual Cost column,
Primary row) in the Raw & Packaging Material Costs worksheet and press
enter in the key pad.
To input the cost figure for primary packaging material under variable costs,
move the cursor to column B, row 10 (Amount column, Primary packaging
material row), press the = sign in the key pad, then move the cursor to column
B, row 8 (Total Annual Cost column, Primary row) in the Raw & Packaging
Material Costs worksheet and press enter in the key pad.
To input the cost figure for secondary packaging material under variable costs,
move the cursor to column B, row 11 (Amount column, Secondary packaging
material row), press the = sign in the key pad, then move the cursor to column
B, row 9 (Total Annual Cost column, Secondary row) in the Raw & Packaging
Material Costs worksheet and press enter in the key pad.
To input the cost figure for direct labor under variable costs, move the cursor
to column B, row 12 (Amount column, Direct labor row), press the = sign in the
key pad, then move the cursor to column H, row 5 (Annual Labor Cost column,
Direct labor row) in the Labor Costs worksheet and press enter in the key pad.
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To input the water charge figure under variable costs, move the cursor to
column B, row 14 (Amount column, Water row), press the = sign in the key pad,
then move the cursor to column E, row 7 (Total Cost column, Water charge
row) in the Other Operating & Admin Costs worksheet and press enter in the
key pad.
To input the electricity cost figure under variable costs, move the cursor to
column B, row 15 (Amount column, Electricity row), press the = sign in the key
pad, then move the cursor to column E, row 6 (Total Cost column, Electricity
row) in the Other Operating & Admin Costs worksheet and press enter in the
key pad.
To input the fuel and oil cost figure under variable costs, move the cursor to
column B, row 16 (Amount column, Fuel and oil row), press the = sign in the
key pad, then move the cursor to column E, row 5 (Total Cost column, Fuel and
oil row) in the Other Operating & Admin Costs worksheet and press enter in
the key pad.
To input other laboratory/plant supplies cost figure under variable costs, move
the cursor to column B, row 17 (Amount column, Other laboratory/plant
supplies row), press the = sign in the key pad, then move the cursor to column
E column, row 11 (Total Cost column, Other laboratory/plant supplies row) in
the Other Operating & Admin Costs and press enter in the key pad.
To input the market promotion cost figure under variable costs, move the cursor
to column B, row 18 (Amount column, Market promotion row), press the = sign
in the key pad, then move the cursor to column E, row 12 (Total Cost column,
Market promotion row) in the Other Operating & Admin Costs worksheet and
press enter in the key pad.
Compute the interest on variable costs by multiplying the sum of all the
estimated variable cost items by 0.22. It was assumed that the interest rate on
borrowed capital is 22% per year. To compute the interest on variable costs,
move the cursor to column B, row 19 (Amount column, Interest on variable
costs row), press the = sign in the key pad, type SUM(, then move the cursor
to column B, row 9 down to column B, row 18, type ), and then press the * sign
in the key pad, type 0.22, and press enter in the key pad.
Under the Cost and Returns worksheet, compute the total variable cost. Move
the cursor to column B, row 20 (Amount column, Total variable cost row), press
the = sign in the key pad, click formula in the tool bar, click , then move the
cursor to column B, row 9 down to column B, row 19 and press enter in the key
pad.
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To input the land charge under fixed costs in the Cost and Returns worksheet,
move the cursor to column B, row 23 (Amount column, Land charge row), press
the = sign in the key pad, then move the cursor to column B, row 4 (Cost
column, Land charge row) under Land Charge worksheet, and press enter in
the key pad.
To input the cost of securing license/permits under fixed costs in the Cost and
Returns worksheet, move the cursor to column B, row 24 (Amount column,
License/permits row), press the = sign in the key pad, then move the cursor to
column E, row 8 (Total Cost column, Permits and licenses row) under the Other
Operating & Admin Costs worksheet, and press enter in the key pad.
To input the insurance cost figure under fixed costs in the Cost and Returns
worksheet, move the cursor to column B, row 25 (Amount column, Insurance
row), press the = sign in the key pad, then move the cursor to column E, row 9
(Total Cost column, Insurance row) under the Other Operating & Admin Costs
worksheet, and press enter in the key pad.
To input the realty tax cost figure under fixed costs in the Cost and Returns
worksheet, move the cursor to column B, row 26 (Amount column, Realty tax
row), press the = sign in the key pad, then move the cursor to column E, row
10 (Total Cost column, Realty tax row) under the Other Operating & Admin
Costs worksheet, and press enter in the key pad.
To input the repairs and maintenance cost figure under fixed costs in the Cost
and Returns worksheet, move the cursor to column B, row 27 (Amount column,
Repairs & maintenance row), press the = sign in the key pad, then move the
cursor to column C, row 9 (Repairs & Maintenance Cost column, Total row) in
the Repairs & Maintenance Costs worksheet, and press enter in the key pad.
To input the annual depreciation cost figure under fixed costs in the Cost and
Returns worksheet, move the cursor to column B, row 28 (Amount column,
Depreciation row), press the = sign in the key pad, then move the cursor to
column G, row 41 (Annual Depreciation column, Total row) in the Fixed Capital
Investment worksheet, press enter in the key pad.
To input the office supplies cost figure under fixed costs in the Cost and Returns
worksheet, move the cursor to column B, row 29 (Amount column, Office
supplies row), press the = sign in the key pad, then move the cursor to column
E, row 14 (Total Cost column, Office supplies row) in the Other Operating &
Admin Costs worksheet, press enter in the key pad.
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To input other administrative labor cost figure (i.e., excluding the cost of hiring
a driver for product distribution) under fixed costs in the Cost and Returns
worksheet, move the cursor to column B, row 30 (Amount column, Other
administrative labor row), press the = sign in the key pad, type SUM(, then
move the cursor to column H, row 7 down to column H, row 10, type ) and press
enter in the key pad.
Under the Cost and Returns worksheet, compute the total fixed cost. Move the
cursor to column B, row 31 (Amount column, Total fixed cost row), press the =
sign in the key pad, click formula in the tool bar, click , then move the cursor
to column B, row 23 down to column B, row 30 and press enter in the key pad.
Under the Cost and Returns worksheet, compute the total cost. Move the
cursor to column B row 33 (Amount column, Total cost row), press the = sign
in the key pad, move the cursor to column B, row 20 (Amount column, Total
variable cost row), press the + sign in the key pad, then move the cursor to
column B, row 31 (Amount column, Total fixed cost row) and press enter in the
key pad.
Under the Cost and Returns worksheet, compute gross margin by subtracting
the total variable cost from gross income. Move the cursor to column B, row 34
(Amount column, Gross margin row), press the = sign in the key pad, move the
cursor to column B, row 6 (Amount column, Total Gross Income row), press
the sign in the key pad, then move the cursor to column B, row 20 (Amount
column, Total variable cost row) and press enter in the key pad.
Under the Cost and Returns worksheet, compute net income by subtracting
total cost from gross income. Move the cursor to column B, row 35 (Amount
column, Net income row), press the = in the key pad, move the cursor to column
B, row 6 (Amount column, Total Gross Income row), press the sign in the key
pad, then move the cursor to column B, row 33 (Amount column, total cost row)
and press enter in the key pad.
Under the Cost and Returns worksheet, compute net income per pack by
dividing net income by annual ubi powder production in packs. Move the cursor
to column B, row 36 (Amount column, Net income/pack row), press the = in the
key pad, move the cursor to column B, row 35 (Amount column, Net income
row), press the / sign (meaning divide) in the key pad, then move the cursor to
column C, row 5 (Annual Ubi Powder Production column, row 5) in the
Production worksheet and press enter in the key pad.
Under the Cost and Returns worksheet, compute adjusted net income by
adding back interest on variable costs or operating costs to net income. Move
the cursor to column B, row 37 (Amount column, Adjusted Net Income row),
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press the = sign in the key pad, move the cursor to column B, row 35 (Amount
column, Net income row), press the + sign in the key pad, then move the cursor
to column B, row 19 (Amount column, Interest on variable costs row) and press
enter in the key pad.
Under the Cost and Returns worksheet, compute return to capital. In this
example, the return to capital is the same as the adjusted net income because
it is assumed that the only source of labor for processing and administrative
work is hired labor. If the investor is directly involved in ubi powder processing
activities, the opportunity cost of his/her labor will be deducted from adjusted
net income to derive the return to capital. Move the cursor to column B, row 38
(Amount column, Return to Capital row), press the = in the key pad, then move
the cursor to column B, row 37 and press enter in the key pad.
Compute the rate of return to capital (in %) in the Cost and Returns Worksheet
by dividing return to capital by the average fixed capital inventory and then
multiplying by 100. Move the cursor to column B, row 39 (Amount column, Rate
of Return to Capital row), press the = sign, then move the cursor to column B,
row 38 (Amount column, Return to Capital row), press the / sign in the key pad,
move the cursor to column F, row 42 in the Fixed Capital Inventory worksheet,
press * in the key pad, then type 100 and press enter in the key pad.
12. Conduct break-even analysis by computing the break-even price and break-
even yield. To compute break-even price, divide total cost by annual production
of ubi powder. Move the cursor to column B, row 44 (Amount column, Break-
even price row), press the = in the key pad, then move the cursor to column B,
row 33 (Amount column, Total cost row) in the Cost and Returns worksheet,
press the / sign in the key pad, move the cursor to column C, row 5 (Annual
Ubi Production column, row 5) in the Production worksheet, and press enter in
the key pad.
To compute break-even yield per year, divide total cost by the selling price of
ubi powder. Move the cursor to column B, row 45 (Amount column, Break-even
yield row), press the = in the key pad, then move the cursor to column B, row
33 (Amount column, Total cost row) in the Cost and Returns worksheet, press
the / sign in the key pad, move the cursor to column D, row 5 (Price Per Pack
column, row 5) in the Production worksheet, and press enter in the key pad.
To compute break-even yield per day, divide break-even yield per year by the
number of operating days per year. Move the cursor to column B, row 46
(Amount column, Break-even yield (packs/day) row), press the = in the key
pad, then move the cursor to column B, row 45 (Amount column, Break-even
yield (packs/year) row) in the Cost and Returns worksheet, press the / sign in
the key pad, then type 176 and press enter in the key pad.
116
117
APPENDIX D
PARTIAL BUDGET ANALYSIS OF PINEAPPLE PRODUCTION
(CURRENT FARMERS PRACTICES VS. GAP)
A. Assumptions Used in Partial Budget Analysis
Appendix Table D.1. Yield, price and gross income of pineapple production, by
type of practices, PhP/ha, Bicol Region, 2016
Pineapple fruits
Yield (pc/ha) 14,580 20,269
Price (PhP/pc) 7.00 7.00
Butterballs
Yield (pc/ha) 9,720 4,131
Price (PhP/pc) 1.00 1.00
Suckers
Yield (pc/ha) 216,000 216,000
Price (PhP/pc) 1.00 1.00
Gross Income 327,780 362,014
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Appendix Table D.2. Costs of pineapple production, by type of practices,
PhP/ha, Bicol Region, 2016
Farmers' Current Good Agricultural
ITEM
Practices Practices
Planting materials 27,000.00 27,000.00
Organic fertilizer 0.00 2,400.00
Malathion 0.00 700.00
Borax 0.00 160.00
Karmex 2,750 0.00
Gibberellic acid 0.00 3,120.00
Labor
Land preparation 7,000.00 3,000.00
Herbicide application 500.00 250.00
Organic fertilizer application 0.00 1,600.00
Insecticide application 0.00 4,500.00
Gibberellic acid application 0.00 750.00
Interest on operating capitala 8,195.00 9,565.60
a
Assumed that capital will be borrowed to defray for expenses on operating capital at
22% interest rate per year
2. Copy the data from Appendix Table D.1 and Appendix Table D.2 to
the Gross Income and Variable Cost worksheet, respectively.
119
3. Under the Variable Cost worksheet, compute interest on operating
capital by getting the sum of all variable costs and multiplying it by the
interest rate. To compute interest on operating capital, move the cursor
to column B, row 17 (Farmers Current Practices column, Interest on
operating capital row), press the = sign in the key pad, type SUM( and
then move the cursor to column B, row 5 (Farmers Current Practices
column, Planting materials row) down to column B, row 16 (Farmers
Current Practices column, Interest on operating capital row), type ),
press the * sign in the key pad, type 0.22 and press enter in the key
pad. To compute interest on operating capital under Good Agricultural
practices, move the cursor to column B, row 17 (Farmers Current
Practices column, Interest on operating capital row) and copy, then
move the cursor to column C, row 17 (Good Agricultural Practices
column, Interest on operating capital row) and paste.
4. Under the Cost and Returns worksheet, link the gross income items
from the Gross Income worksheet and the variable cost items from the
Variable Cost worksheet. Compute gross margin by taking the
difference between gross income and total variable cost. To compute
gross margin under farmers current practices, press the = sign in the
key pad, then move the cursor to column B, row 8 (Farmers Current
Practices column, Total Gross Income row), press the sign in the key
pad, then move the cursor to column B, row 24 (Farmers Current
Practices column, Total Variable Cost row) and press enter in the key
pad. To compute gross margin under Good Agricultural practices, move
the cursor to column B, row 26 (Farmers Current Practices column,
Gross Margin row) and copy, then move the cursor to column C, row 26
(Good Agricultural Practices column, Gross Margin row) and paste.
120
5. Under the Cost and Returns worksheet, summarize the differences
between Good Agricultural practices and farmers current practices.
Move the cursor to column D, row 3 and type Difference (GAP-FCP).
To compute the difference in gross income from pineapple fruit sales,
move the cursor to column D, row 5 (Difference column, Pineapple fruits
sales row), press the = sign in the key pad, move the cursor to column
C, row 5 (Good Agricultural Practices column, Pineapple fruit sales
row), press the sign in the key pad, then move the cursor to column
B, row 5 (Farmers Current Practices column, Pineapple fruit sales row)
and press enter in the key pad. To compute the difference in butterball
sales up to gross margin, move the cursor to column D, row 6
(Difference column, Pineapple fruit sales row), copy and then move the
cursor to column D, row 6 (Difference column, Butterball sales row)
down to column D, row 26 (Difference column, Gross Margin row) and
paste.
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7. Under the Partial Budget worksheet, link the values of added returns,
reduced costs, added costs, and reduced returns from the Cost and
Returns Worksheet. For gross income from additional pineapple fruits,
move the cursor to column B, rows 5-8 (PhP/ha column, Gross income
from additional pineapple fruits row) under added returns, press the =
sign in the key pad, then move the cursor to column D, row 5 (Difference
column, Pineapple fruits sales row) in the Cost and Returns worksheet
and press enter in the key pad.
For Karmex cost under reduced costs, move the cursor to column B,
row 15 (PhP/ha column, Karmex cost row), press the = sign in the key
pad, then move the cursor to column D, row 15 (Difference column,
Karmex row) in the Cost and Returns worksheet, press the * sign in the
key pad, type -1, and press enter in the key pad.
For the cost of labor for herbicide application under reduced costs,
move the cursor to column B, row 16 (PhP/ha column, Labor cost for
herbicide application row), press the = sign in the key pad, then move
the cursor to column D, row 19 (Difference column, Herbicide
application row) in the Cost and Returns worksheet, press the * sign in
the key pad, type -1, and press enter in the key pad.
For the cost of labor for land preparation under reduced costs, move
the cursor to column B, row 17 (PhP/ha column, Labor cost for land
preparation row), press the = sign in the key pad, then move the cursor
to column D, row 18 (Difference column, Land preparation row) in the
Cost and Returns worksheet, press the * sign in the key pad, type -1,
and press enter in the key pad.
For the cost of organic fertilizer under added costs, move the cursor to
column D, row 5 (PhP/ha column, Organic fertilizer cost row), press the
= sign in the key pad, then move the cursor to column D, row 12
(Difference column, Organic fertilizer row) in the Cost and Returns
worksheet and press enter in the key pad.
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For the cost of Malathion under added costs, move the cursor to column
D, row 6 (PhP/ha column, Malathion cost row), press the = sign in the
key pad, then move the cursor to column D, row 13 (Difference column,
Malathion row) in the Cost and Returns worksheet and press enter in
the key pad.
For the cost of Borax under added costs, move the cursor to column D,
row 7 (PhP/ha column, Borax cost row), press the = sign in the key pad,
then move the cursor to column D, row 14 (Difference column, Borax
row) in the Cost and Returns worksheet and press enter in the key pad.
For the cost of Gibberellic acid under added costs, move the cursor to
column D, row 8 (PhP/ha column, Gibberellic acid cost row), press the
= sign in the key pad, then move the cursor to column D, row 16
(Difference column, Gibberellic acid row) in the Cost and Returns
worksheet and press enter in the key pad.
For the cost of labor for organic fertilizer application under added costs,
move the cursor to column D, row 9 (PhP/ha column, Labor cost for
organic fertilizer application row), press the = sign in the key pad, then
move the cursor to column D, row 20 (Difference column, Organic
fertilizer application row) in the Cost and Returns worksheet and press
enter in the key pad.
For the cost of labor for insecticide application under added costs, move
the cursor to column D, row 10 (PhP/ha column, Labor cost for
insecticide application row), press the = sign in the key pad, then move
the cursor to column D, row 21 (Difference column, Insecticide
application row) in the Cost and Returns worksheet and press enter in
the key pad.
For the cost of labor for Gibberellic acid application under added costs,
move the cursor to column D, row 11 (PhP/ha column, Labor cost for
Gibberellic acid application row), press the = sign in the key pad, then
move the cursor to column D, row 22 (Difference column, Gibberellic
acid application row) in the Cost and Returns worksheet and press enter
in the key pad.
For the interest on operating capital under added costs, move the cursor
to column D, row 12 (PhP/ha column, Interest on operating capital row),
press the = sign in the key pad, then move the cursor to column D, row
23 (Difference column, Interest on operating capital row) in the Cost and
Returns worksheet and press enter in the key pad.
For the gross income from butterballs, move the cursor to column D,
row 15 (PhP/ha column, Gross income from butterballs row), press the
= sign in the key pad, then move the cursor to column D, row 23
(Difference column, Interest on operating capital row) in the Cost and
Returns worksheet, press the * sign in the key pad, type -1, and press
enter in the key pad.
123
8. Compute total gains by getting the sum of added returns and reduced
costs. To compute total gains, move the cursor to column B row 19
(PhP/ha column, Total A row), press the = sign in the key pad, type
SUM(, then move the cursor to column B, row 5 down to column B, row
18, type ) and press enter in the key pad.
9. Compute total losses by getting the sum of added costs and reduced
returns. To compute total losses, move the cursor to column D row 19
(PhP/ha column, Total B row), press the = sign in the key pad, type
SUM(, then move the cursor to column B, row 5 down to column B, row
18, type ) and press enter in the key pad.
10. Compute the change in net income by getting the difference between
total gains and total losses. To compute change in net income, move
the cursor to column C row 20 (PhP/ha column, Change in Net Income
row), press the = sign in the key pad, then move the cursor to column
B, row 19 (PhP/ha column, Total A row), press the sign in the key pad,
then move the cursor to column D, row 19 (PhP/ha column, Total B row)
and press enter in the key pad.
124
11. Type the non-pecuniary factor/s in any cell below the partial budget
table.
125
APPENDIX E
PARTIAL BUDGET ANALYSIS OF ONION STORAGE
(SELLING IMMEDIATELY VS. SELLING AFTER STORING
ONIONS FOR SIX MONTHS IN A COLD STORAGE FACILITY)
a. Assumptions Used in Partial Budget Analysis
The assumptions used in conducting partial budget analysis of storing onions were
based on the farm survey conducted by FREEDOM in the implementation of
ARCCESS Project in Nueva Ecija.
Appendix Table E.1. Average volume of onions sold, selling price and gross
income, Nueva Ecija, 2016
Selling Immediately Selling After Storing for
ITEM
After Harvest Six Months
Volume solda (kg) 3,190 3,190
Selling price (PhP/kg) 22.35 44.49
Gross income (PhP) 71,296.50 141,923.10
a
1 bag of onions = 27.5 kilograms
Appendix Table E.2. Cost of storing onions for six months in a cold storage
facility, Nueva Ecija, 2016
TIME OF SALE (PhP/kg)
ITEM Selling Immediately Selling After Storing
After Harvest for Six Months
Storage fee - 6.87
Transport cost - 0.29
Biling cost - 0.11
Interest on capitala - 0.80
a
Assumed that capital will be borrowed to defray for expenses on operating capital at
22% interest rate per year or 11% for 6 months
2. Copy the data from Appendix Table E.1 and Appendix Table E.2 to the
Gross Income and Variable Cost worksheet, respectively.
126
column B, row 5 (Selling Immediately After Harvest column, Selling
price row), type ) and press enter in the key pad. To compute gross
income under selling after storing for six months, move the cursor to
column B, row 6 (Selling Immediately After Harvest column, Gross
income row) and copy, then move the cursor to column C, row 6 (Selling
After Storing for Six Months column, Gross Income row) and paste.
4. Under the Cost and Returns worksheet, link the gross income item from
the Gross Income worksheet and the variable cost items from the
Variable Cost worksheet. And then, summarize the differences between
selling after six months of storage and selling immediately after harvest.
Move the cursor to column D, row 3 and type Difference (SASFSM-
SIAH). To compute the difference in gross income per kilogram of
onions sold (i.e., selling price of onion), move the cursor to column D,
row 5 (Difference column, Onion sales row), press the = sign in the key
pad, move the cursor to column C, row 5 (Selling After Six Months of
Storage column, Onion sales row), press the sign in the key pad, then
move the cursor to column B, row 5 (Selling Immediately After Harvest,
Onion sales row) and press enter in the key pad. To compute the
difference in total gross income up to total variable cost, move the
cursor to column D, row 5 (Difference column, Onion sales row, copy
and then move the cursor to column D, row 6 (Difference column, Total
Gross Income row) down to column D, row 13 (Difference column, Total
Variable Cost row) and paste. To compute for the difference in gross
margin between selling after six months of storage and selling
immediately after harvest, move the cursor to column D, row 15
127
(Difference column, Gross Margin row), press the = sign in the key pad,
and then move the cursor to column D, row 6 (Difference column, Total
Gross Income row), press the sign in the key pad, then move the
cursor to column D, row 13 (Difference column, Total Variable cost row)
and press enter in the key pad.
6. Under the Partial Budget worksheet, link the values of added returns,
reduced costs, added costs, and reduced returns from the Cost and
Returns Worksheet. For additional price received for storing onions for
6 months, move the cursor to column B, rows 5-8 (PhP/ha column,
Additional price received for storing onions for 6 months row) under
added returns, press the = sign in the key pad, then move the cursor to
column D, row 5 (Difference column, Onion sales row) in the Cost and
Returns worksheet and press enter in the key pad.
Since there is no reduced cost item, move the cursor to column A, rows
5-8 and type None.
For the cost of storage rental under added costs, move the cursor to
column D, row 5 (PhP/ha column, Storage rental row), press the = sign
in the key pad, then move the cursor to column D, row 9 (Difference
128
column, Storage fee row) in the Cost and Returns worksheet and press
enter in the key pad.
For the cost of transportation under added costs, move the cursor to
column D, row 6 (PhP/ha column, Transport cost row), press the = sign
in the key pad, then move the cursor to column D, row 10 (Difference
column, Transport cost row) in the Cost and Returns worksheet and
press enter in the key pad.
For the cost of bailing under added costs, move the cursor to column D,
row 7 (PhP/ha column, Biling cost row), press the = sign in the key pad,
then move the cursor to column D, row 11 (Difference column, Biling
cost row) in the Cost and Returns worksheet and press enter in the key
pad.
For the cost of interest on operating capital under added costs, move
the cursor to column D, row 8 (PhP/ha column, Interest on operating
capital row), press the = sign in the key pad, then move the cursor to
column D, row 12 (Difference column, Interest on operating capital row)
in the Cost and Returns worksheet and press enter in the key pad. Since
there is no reduced return item, move the cursor to column C, row 11
and type None.
7. Compute total gains by getting the sum of added returns and reduced
costs. To compute total gains, move the cursor to column B row 13
(PhP/ha column, Total A row), press the = sign in the key pad, type
SUM(, then move the cursor to column B, row 5 down to column B, row
12, type ) and press enter in the key pad.
129
8. Compute total losses by getting the sum of added costs and reduced
returns. To compute total losses, move the cursor to column D row 13
(PhP/ha column, Total B row), press the = sign in the key pad, type
SUM(, then move the cursor to column B, row 5 down to column B, row
12, type ) and press enter in the key pad.
130
10. Type the non-pecuniary factor/s in any cell below the partial budget
table.
131
APPENDIX F
FINANCIAL AND SENSITIVITY ANALYSES OF COCONUT
AND COFFEE BUSINESS ENTERPRISE
A. Assumptions Used in Financial Analysis
2. Coconut is the main crop while coffee is planted as an intercrop. The established
coconut trees are already bearing. Grafted coffee trees will bear fruit (i.e., berries)
starting in year 3.
3. The discount rate is assumed to be 22%, the prevailing bank lending rate since
it is assumed that the only source of project funds will be loans. If both borrowed
and equity capital will be the sources of project funds, then the weighted average
cost of capital should be used as the discount rate.
5. The use of constant prices was the analytical approach applied in conducting
financial analysis of the coconut and coffee enterprise. Hence, the estimated
copra sales from year 1 to year 10 and the dried coffee bean sales from year 3
to year 10 are assumed to be the same. Likewise, the operating and maintenance
costs are assumed to be the same from year 1 to year 10.
132
Appendix Table F.1a. Annual production and selling price of copra, Davao, 2016
Nut Production Copra Productiona Copra Selling Price
Year
(kg/ha) (kg/ha) (PhP/kg)
Appendix Table F.1b. Annual production and selling price of coffee (Excelsa),
Davao, 2016
Selling Price of Dried
Fresh Berries Dried Coffee Beansa
Year Coffee Beans
(kg/ha) (kg/ha)
(PhP/kg)
1 0 0 76.29
2 0 0 76.29
3 200 100 76.29
4 582 291 76.29
5 1,191 595.5 76.29
6 2,197 1,099 76.29
7 2,197 1,099 76.29
8 2,197 1,099 76.29
9 2,187 1,099 76.29
10 2,998 1,499 76.29
a
1 kg of fresh coffee berries = 0.50 kg of dried coffee beans
938 trees/ha
133
Appendix Table F.2a. Annual material input requirements in coconut production
and buying prices of material inputs, Davao, 2016
Ammonium Sulfate Potassium Chloride
(21-0-0) (KCl or 0-0-60)
Year Quantitya Price Quantitya Price
(No. of bags) (PhP/bag) (No. of bags) (PhP/bag)
1 5 475.00 7 997.00
2 5 475.00 7 997.00
3 5 475.00 7 997.00
4 5 475.00 7 997.00
5 5 475.00 7 997.00
6 5 475.00 7 997.00
7 5 475.00 7 997.00
8 5 475.00 7 997.00
9 5 475.00 7 997.00
10 5 475.00 7 997.00
a
1 bag of fertilizer = 50 kg
Note: The coconut trees are already established and bearing
134
Appendix Table F.2b. Continued.
Ammonium Sulfate Potassium Chloride
(21-0-0) (KCl or 0-0-60)
Year Quantitya Price Quantitya Price
(No. of bags) (PhP/bag) (No. of bags) (PhP/bag)
1 2.81 475.00 997.00
2 12.19 475.00 5.63 997.00
3 9.38 475.00 11.26 997.00
4 9.38 475.00 11.26 997.00
5 9.38 475.00 11.26 997.00
6 9.38 475.00 11.26 997.00
7 8.44 475.00 16.88 997.00
8 9.38 475.00 11.26 997.00
9 9.38 475.00 11.26 997.00
10 9.38 475.00 11.26 997.00
a
1 bag of fertilizer = 50 kg
135
Appendix Table F.3a. Labor requirements and wages in coconut production,
Davao, 2016
Farm Operation Assumption
Fertilizer application and circle Year 1, 27 man-days at PhP 250/day
weeding
Harvesting of nuts Years 1-10, PhP 0.40/nut as labor payment
Hauling and piling of nuts Years 1-10, PhP 0.35/nut as labor payment
Dehusking of nuts Years 1-10, PhP 0.35/nut as labor payment
Copra making Years 1-10, PhP 0.15/nut as labor payment
Transporting/handling of copra Years 1-10, PhP 0.25/nut as labor payment
136
Appendix Table F.4. Other operating costs in coconut and coffee enterprise,
Davao, 2016
Cost Item Annual Cost (PhP)
Land rent 14,000.00
Appendix Table F.5. Fixed capital investment in coconut and coffee enterprise,
Davao,2016
Useful Purchase
Fixed Capital Investment Item Quantity Unit Life Cost/Unit
(Years) (PhP)
Weighing scale (10 kg) 1 pc 10 1,100.00
Plastic knapsack sprayer (16 liters) 2 pcs 5 2,700.00
Wheel barrow 2 pcs 5 3,600.00
Pruning shears 2 pcs 5 510.00
Scythe 5 pcs 5 360.00
Pail 10 pcs 5 60.00
Crowbar ("bareta") 2 pcs 5 310.00
Bolo 3 pcs 5 160.00
Appendix Table F.5. Fixed capital investment schedule in coconut and coffee
enterprise, Davao, 2016
Total Cost (PhP)
Fixed Capital Investment Item
Year 1 Year 6
Weighing scale (10 kg) 1,100.00
Plastic knapsack sprayer (16 liters) 5,400.00 5,400.00
Wheel barrow 7,200.00 7,200.00
Pruning shears 1,020.00 1,020.00
Scythe 1,800.00 1,800.00
Pail 600.00 600.00
Crowbar ("bareta") 620.00 620.00
Bolo 480.00 480.00
137
C. Steps in Conducting Financial Analysis of Coconut + Coffee Enterprise, 10 Years of
Operation
1.0 Prepare an Excel spreadsheet with the following worksheet titles: Production, Material
Costs, Labor Costs, Other Production Costs, Fixed Capital Investment, Fixed Capital
Inv. (i.e., Investment) Schedule, and Financial & Sensit (i.e., Sensitivity) Analyses.
2.0 Copy the data from Appendix Table F.1, Appendix Table F. 2, Appendix Table F.3,
Appendix Table F.4, Appendix Table F.5, and Appendix Table F.6 to the Production
worksheet, Material Costs worksheet, Labor Costs worksheet, Other Production Costs
worksheet, Fixed Capital Investment worksheet, and Fixed Capital Inv. Schedule
worksheet, respectively.
3.0 In the Production worksheet, compute the gross income or sales of copra and coffee
(Excelsa) and estimate the production costs in other worksheets.
3.1 Under the Production worksheet, to compute copra production in year 1, multiply nut
production by 0.25 (i.e., 1 nut = 0.25 kg of copra). Move the cursor to column B, row 5
(Year 1 column, copra production row), press the = sign in the key pad, then move the
cursor to column B, row 4 (Year 1 column, Nut production row), type 0.25 and press
enter in the key pad. To determine the annual copra production from year 2 to year 10,
move the cursor to B5, click the copy menu in the tool bar, then move or drag the cursor
to the right from C5 to K5, and click the paste menu in the tool bar. To compute annual
copra sales/income in year 1, multiply annual copra production by the selling price of
copra per kilogram (kg). Move the cursor to column B, row 7 (Year 1 column, Copra
sales/income row), press the = sign in the key pad, then move the cursor to column B,
row 5 (Year 1 column, Copra production row), press the * sign in the key pad, and
finally move the cursor to column B, row 6 (Year 1 column, Copra selling price row),
then press enter in the key pad. To determine the annual gross income from copra from
year 2 to year 10, move the cursor to B7, click the copy menu in the tool bar, then move
or drag the cursor to the right from C7 to K7, and click the paste menu in the tool bar.
Under the same worksheet, compute dried bean production in year 1 by multiplying
fresh berry production by 0.5 (i.e., 1 kg of fresh berry = 0.5 kg of dried berry). Move the
cursor to column B, row 16 (Year 1 column, Dried berry production row), press the =
138
sign in the key pad, then move the cursor to column B, row 15 (Year 1 column, Fresh
berry production row), type 0.5 and press enter in the key pad. To determine the annual
dried bean production from year 2 to year 10, move the cursor to B16, click the copy
menu in the tool bar, then move or drag the cursor to the right from C16 to K16, and
click the paste menu in the tool bar. To compute annual coffee sales/income in year 1,
multiply dried coffee bean production by its selling price. Move the cursor to column B,
row 18 (Year 1 column, Coffee sales/income row), press the = sign in the key pad, then
move the cursor to column B, row 16 (Year 1 column, Dried bean production row),
press the * sign in the key pad, and finally move the cursor to column B, row 17 (Year
1 column, Dried bean selling price row), then press enter in the key pad. To determine
the annual sales/income from coffee from year 2 to year 10, move the cursor to B18,
click the copy menu in the tool bar, then move or drag the cursor to the right from C18
to K18, and click the paste menu in the tool bar.
3.2 Under the Material Costs worksheet, compute the cost of each material input by
multiplying the quantity of each material input used by its unit price.
For example, to compute the annual cost of applying ammonium sulfate fertilizer in
coconut production in year 1, move the cursor to column D, row 5 (Fertilizer Cost, row
5), press the = sign in the key pad and then move the cursor to column B, row 5
(Quantity column, row 5), press the * sign in the key pad, move the cursor to column
C, row 5 (Price/bag column, row 5), and finally press enter in the key pad. To determine
the cost of applying ammonium sulfate in coconut production from year 2 to year 10,
move the cursor to D5, click the copy menu in the tool bar, then move or drag the cursor
down to D6 to D14, and click the paste menu in the tool bar.
139
F, row 5 (Price/bag column, row 5, and finally press enter in the key pad. To determine
the cost of applying potassium chloride in coconut production from year 2 to year 10,
move the cursor to G5, click the copy menu in the tool bar, then move or drag the
cursor down to G6 to G14, and click the paste menu in the tool bar.
Add all the estimated annual material (i.e., fertilizer) costs incurred in coconut
production in year 1 by moving the cursor to column H5, then pressing the = sign in the
key pad, moving the cursor to D5, clicking the + sign in the key pad, moving the cursor
to G5, and pressing enter in the key pad. To determine the total material cost incurred
in coconut production from year 2 to year 10, move the cursor to H5, click the copy
menu in the tool bar, then move or drag the cursor down to H6 to H14, and click the
paste menu in the tool bar.
With regard to coffee production, to estimate the cost of seedlings in year 1, move the
cursor to column D, row 27 (Seedling Cost column, row 27), press the = sign in the key
pad and then move the cursor to column B, row 27 (Quantity column, row 27), press
the * sign in the key pad, move the cursor to column C, row 27 (Price/seedling column,
row 27), and finally press enter in the key pad.
140
To compute the annual cost of applying ammonium sulfate fertilizer in coffee production
in year 1, move the cursor to J, row 27 (Fertilizer Cost column, row 27), press the =
sign in the key pad and then move the cursor to column H, row 27 (Quantity column,
row 27), press the * sign in the key pad, move the cursor to column I, row 27 (Price/bag
column, row 27, and finally press enter in the key pad. To determine the the cost of
applying ammonium sulfate in coffee production from year 2 to year 10, move the
cursor to J27, click the copy menu in the tool bar, then move or drag the cursor down
to J28 to J36, and click the paste menu in the tool bar.
To estimate the annual cost of applying zinc sulfate fertilizer in coffee production in
year 7, move the cursor to column P, row 33 (Fertilizer Cost column, row 33), press the
= sign in the key pad and then move the cursor to column N, row 33 (Quantity column,
row 33), press the * sign in the key pad, move the cursor to column O, row 33 (Price/bag
column, row 33), and finally press enter in the key pad.
141
To compute the cost of using insecticide in coffee production in year 1, move the cursor
to column S, row 27 (Insecticide Cost column, row 27), press the = sign in the key pad
and then move the cursor to column Q, row 27 (Quantity column, row 27), press the *
sign in the key pad, move the cursor to column R, row 27 (Price/liter column, row 27),
and finally press enter in the key pad.
To determine the cost of using fungicide in coffee production in year 1, move the cursor
to column V, row 27 (Fungicide Cost column, row 27), press the = sign in the key pad
and then move the cursor to column T, row 27 (Quantity column, row 27), press the *
sign in the key pad, move the cursor to column U, row 27 (Price/kg column, row 27),
and finally press enter in the key pad.
Add all the estimated annual material costs incurred in coffee production in year 1.
Move the cursor to W27, then press the = sign in the key pad, move the cursor to D27,
click the + sign in the key pad, move the cursor to G27, click the + sign in the key pad,
move the cursor to J27, click the + sign in the key pad, move the cursor to M27, click
the + sign in the key pad, move the cursor to P27, click the + sign in the key pad, move
the cursor to S27, click the + sign in the key pad, then move the cursor to V27, and
press enter in the key pad. To determine the total material cost incurred in coffee
production from year 2 to year 10, move the cursor to W27, click the copy menu in the
tool bar, then move or drag the cursor down to W28 to W36, and click the paste menu
in the tool bar.
142
Prepare a summary table showing total material cost in each year for both crops. To
transfer the estimated total material cost in coconut production from year 1 to year 10,
move the cursor (i.e., highlight) from H5 to H14, press copy in the menu in the tool bar,
move the cursor to B42, right click the mouse, press paste special, click values, click
transpose, then click okay. To transfer the estimated total material cost in coffee
production from year 1 to year 10, move the cursor (i.e., highlight) from W27 to W36,
press copy in the menu in the tool bar, move the cursor to B43, right click the mouse,
press paste special, click values, click transpose, then click okay.
Compute the total material cost incurred in producing both crops by adding the total
material cost spent in coconut production and the total material cost incurred in coffee
production in each year. To compute the total material cost incurred in producing both
crops in year 1, move the cursor to B44, press the = sign in the key pad, move the
cursor to B42, press the + sign in the key pad, then move the cursor to B43, and press
enter in the key pad. To determine the total material cost incurred in producing both
crops from year 2 to year 10, move the cursor to B44, click the copy menu in the tool
bar, move and drag the cursor to the right to C44 up to K44, and the click paste menu
in the tool bar.
3.3 Under the Labor Cost worksheet, compute the annual labor costs in coconut and coffee
production.
To compute the annual labor cost in fertilizer application and circle weeding in coconut
production in year 1, move the cursor to column E, row 5 (Labor Cost column, row 5),
press the = sign in the key pad and move the cursor to the merged column B&C, row
5 (Labor Reqmt column, row 5) cell. Press the * sign in the key pad, move the cursor
to column D, row 5 (Wage Rate/Day column, row 5), and then press enter in the key
pad.
To determine the annual labor cost in harvesting coconut in year 1, move the cursor to
column H, row 5 (Labor Cost column, row 5), press the = sign in the key pad and move
the cursor to column F, row 5 (Coconut Production column, row 5). Press the * sign in
the key pad, move the cursor to column G, row 5 (Wage Rate/Nut column, row 5), and
then press enter in the key pad. To determine the annual labor cost in harvesting
coconut from year 2 to year 10, move the cursor to H5, click the copy menu in the tool
bar, then move or drag the cursor down to H6 up to H14, and click the paste menu in
the tool bar.
143
To compute the annual labor cost in hauling and piling of nuts in year 1, move the
cursor to column K, row 5 (Labor Cost column, row 5), press the = sign in the key pad
and move the cursor to column I, row 5 (Coconut Production column, row 5). Press the
* sign in the key pad, move the cursor to column J, row 5 (Wage Rate/Nut column, row
5), and then press enter in the key pad. To determine the annual labor cost in hauling
and piling of nuts from year 2 to year 10, move the cursor to K5, click the copy menu
in the tool bar, then move or drag the cursor down to K6 up to K14, and click the paste
menu in the tool bar.
To determine the annual labor cost in dehusking of nuts in year 1, move the cursor to
column N, row 5 (Labor Cost column, row 5), press the = sign in the key pad and move
the cursor to column L, row 5 (Coconut Production column, row 5). Press the * sign in
the key pad, move the cursor to column M, row 5 (Wage Rate/Nut column, row 5), and
then press enter in the key pad. To determine the annual labor cost in dehusking of
nuts from year 2 to year 10, move the cursor to N5, click the copy menu in the tool bar,
then move or drag the cursor down to N6 up to N14, and click the paste menu in the
tool bar.
To calculate the annual labor cost in copra making in year 1, move the cursor to column
Q, row 5 (Labor Cost column, row 5), press the = sign in the key pad and move the
cursor to column O, row 5 (Coconut Production column, row 5). Press the * sign in the
key pad, and move the cursor to column P, row 5 (Wage Rate/Nut column, row 5).
Press enter in the key pad. To determine the annual labor cost in copra making from
year 2 to year 10, move the cursor to Q5, click the copy menu in the tool bar, then
move or drag the cursor down to Q6 up to Q14, and click the paste menu in the tool
bar.
144
To estimate the annual labor cost in transporting and handling of copra in year 1, move
the cursor to column T, row 5 (Labor Cost column, row 5), press the = sign in the key
pad, move the cursor to column R, row 5 (Coconut Production column, row 5). Press
the * sign in the key pad, and move the cursor to column S, row 5 (Wage Rate/Kg
column, row 5). Press enter in the key pad. To determine the annual labor cost in
transporting and handling of copra from year 2 to year 10, move the cursor to T5, click
the copy menu in the tool bar, then move or drag the cursor down to T6 up to T14, and
click the paste menu in the tool bar.
Add all the estimated total labor cost for all farm operations in coconut production in
year 1. Move the cursor to U5, then press the = sign in the key pad, move the cursor
to E5, click the + sign in the key pad, move the cursor to H5, click the + sign in the key
pad, move the cursor to K5, click the + sign in the key pad, move the cursor to N5, click
the + sign in the key pad, move the cursor to Q5, click the + sign in the key pad, move
the cursor to T5, and then press enter in the key pad. To determine the total labor cost
for all farm operations in coconut production from year 2 to year 10, move the cursor
to U5, click the copy menu in the tool bar, then move or drag the cursor down to U6 up
to U14, and click the paste menu in the tool bar.
With regard to the estimation of the annual labor cost in land clearing operation in
coffee production in year 1, move the cursor to column E, row 21 (Labor Cost column,
row 21), press the = sign in the key pad, move the cursor to merged column B&C, row
21 (Labor Reqmt column, row 21). Press the * sign in the key pad, and move the cursor
to column D, row 21 (Wage Rate/Day column, row 21). Press enter in the key pad.
145
Follow the same steps in computing the annual labor cost in stake preparation and
staking in coffee production in year 1. Move the cursor to column H, row 21 (Labor Cost
column, row 21), press the = sign in the key pad, move the cursor to column F, row 21
(Labor Reqmt column, row 21). Press the * sign in the key pad, and move the cursor
to column G, row 21 (Wage Rate/Day column, row 21). Press enter in the key pad.
To calculate the annual labor cost in holing, planting and fertilizer application in coffee
production in year 1, move the cursor to column K, row 21 (Labor Cost column, row
21), press the = sign in the key pad, move the cursor to column I, row 21 (Labor Reqmt
column, row 21). Press the * sign in the key pad, and move the cursor to column J, row
21 (Wage Rate/Day column, row 21). Press enter in the key pad.
To compute the annual labor cost in replanting coffee seedlings in year 1, move the
cursor to column N, row 21 (Labor Cost column, row 21), press the = sign in the key
pad, move the cursor to column L, row 21 (Labor Reqmt column, row 21). Press the *
sign in the key pad, and move the cursor to column M, row 21 (Wage Rate/Day column,
row 21). Press enter in the key pad.
To calculate the annual labor cost in ring weeding in coffee production in year 1, move
the cursor to column Q, row 21 (Labor Cost column, row 21), press the = sign in the
key pad, move the cursor to column O, row 21 (Labor Reqmt column, row 21). Press
the * sign in the key pad, and move the cursor to column P, row 21 (Wage Rate/Day
146
column, row 21). Press enter in the key pad. To determine the annual labor cost in ring
weeding from year 2 to year 10, move the cursor to Q21, click the copy menu in the
tool bar, then move or drag the cursor down to Q22 up to Q30, and click the paste
menu in the tool bar.
To determine the annual labor cost in fertilizer application in coffee production in year
1, move the cursor to column T, row 21 (Labor Cost column, row 21), press the = sign
in the key pad, move the cursor to column R, row 21 (Labor Reqmt column, row 21).
Press the * sign in the key pad, and move the cursor to column S, row 21 (Wage
Rate/Day column, row 21). Press enter in the key pad. To determine the annual labor
cost in fertilizer application from year 2 to year 10, move the cursor to T21, click the
copy menu in the tool bar, then move or drag the cursor down to T22 up to T30, and
click the paste menu in the tool bar.
To determine the annual labor cost in spraying insecticides in coffee production in year
1, move the cursor to column Z, row 21 (Labor Cost column, row 21), press the = sign
in the key pad, move the cursor to column X, row 21 (Labor Reqmt column, row 21).
Press the * sign in the key pad, and move the cursor to column Y, row 21 (Wage
Rate/Day column, row 21). Press enter in the key pad. To determine the annual labor
cost in spraying insecticides from year 2 to year 10, move the cursor to Z21, click the
147
copy menu in the tool bar, then move or drag the cursor down to Z22 up to Z30, and
click the paste menu in the tool bar.
To calculate the annual labor cost in pruning and removal of sprouts in coffee
production in year 1, move the cursor to column AC, row 21 (Labor Cost column, row
21), press the = sign in the key pad, move the cursor to column AA, row 21 (Labor
Reqmt column, row 21). Press the * sign in the key pad, and move the cursor to column
AB, row 21 (Wage Rate/Day column, row 21). Press enter in the key pad. To determine
the annual labor cost in pruning and removal of sprouts from year 2 to year 10, move
the cursor to AC21, click the copy menu in the tool bar, then move or drag the cursor
down to AC22 up to AC30, and click the paste menu in the tool bar.
To compute the annual labor cost in harvesting coffee in year 3, move the cursor to
column AF, row 23 (Labor Cost column, row 23), press the = sign in the key pad, move
the cursor to column AD, row 23 (Coffee Berry Production column, row 23). Press the
* sign in the key pad, and move the cursor to column AE, row 23 (Wage Rate/Kg
column, row 23). Press enter in the key pad. To determine the annual labor cost in
harvesting coffee from year 4 to year 10, move the cursor to AF23, click the copy menu
in the tool bar, then move or drag the cursor down to AF24 up to AF30, and click the
paste menu in the tool bar.
To estimate the annual labor cost in processing coffee berries/beans in year 3, move
the cursor to column AI, row 23 (Labor Cost column, row 23), press the = sign in the
key pad, move the cursor to column AG, row 23 (Coffee Berry Production column, row
23). Press the * sign in the key pad, and move the cursor to column AH, row 23 (Wage
Rate/Kg column, row 23). Press enter in the key pad. To determine the annual labor
cost in processing coffee berries/beans from year 4 to year 10, move the cursor to
AI23, click the copy menu in the tool bar, then move or drag the cursor down to AI24
up to AI30, and click the paste menu in the tool bar. As mentioned earlier, coffee
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processing operations include drying and pulping the berries, winnowing, drying the
depulped berries, and sorting the dried beans.
Add all the estimated total labor cost for all farm operations in coffee production in year
1. Move the cursor to AJ21, then press the = sign in the key pad, move the cursor to
E21, click the + sign in the key pad, move the cursor to H21, click the + sign in the key
pad, move the cursor to K21, click the + sign in the key pad, move the cursor to N21,
click the + sign in the key pad, move the cursor to Q21, click the + sign in the key pad,
move the cursor to T21, click the + sign in the key pad, move the cursor to W21, click
the + sign in the key pad, move the cursor to Z21, click the + sign in the key pad, move
the cursor to AC21, click the + sign in the key pad, move the cursor to AF21, click the
+ sign in the key pad, move the cursor to AI21, and press enter in the key pad. To
determine the total labor cost for all farm operations in coffee production from year 2
to year 10, move the cursor to AJ21, click the copy menu in the tool bar, then move or
drag the cursor down to AJ22 up to AJ30, and click the paste menu in the tool bar.
Prepare a summary table showing the total labor cost in each year for both crops. To
transfer the estimated total labor cost in coconut production from year 1 to year 10,
move the cursor (i.e., highlight) from U5 to U14, press copy in the menu in the tool bar,
move the cursor to B36, right click the mouse, press paste special, click values, click
transpose, then click okay. To transfer the estimated total labor cost in coffee
production from year 1 to year 10, move the cursor (i.e., highlight) from Aj21 to Aj30,
press copy in the menu in the tool bar, move the cursor to B37, right click the mouse,
press paste special, click values, click transpose, then click okay.
Compute the total labor costs incurred in producing both crops by adding the total labor
cost spent in coconut production and the total labor cost incurred in coffee production
in each year. To compute the total labor cost incurred in producing both crops in year
1, move the cursor to B38, press the = sign in the key pad, move the cursor to B36,
press the + sign in the key pad, move the cursor to B37, and press enter in the key
pad. To determine the total labor cost incurred in producing both crops from year 2 to
year 10, move the cursor to B38, click the copy menu in the tool bar, move and drag
the cursor to the right to C38 up to K38, and then click the paste menu in the tool bar.
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3.4 Under the Other Production Costs worksheet, compute the total other operating costs.
Move the cursor to column B, row 7 (Cost Per Hectare column, total row), press the =
sign in the key pad, then move the cursor to column B, row 5 (Cost Per Hectare column,
land rent row), and then press enter in the key pad.
3.5 Under Fixed Capital Investment worksheet, compute the total cost of the weighing
scale by multiplying the quantity of weighing scale bought by its cost per unit. Move the
cursor to column F, row 6 (Total Purchase Cost column, weighing scale row), press the
= sign in the key pad, move the cursor to column B, row 6 (Quantity column, weighing
scale row), press the * sign in the key pad, and then move the cursor to column E, row
6 (Purchase Cost/unit column, weighing scale row). Press enter in the key pad
To compute the total cost of other fixed capital items used in the coconut + coffee
enterprise, move the cursor to column F, row 6 (Total Purchase Cost column, weighing
scale row), then click the copy menu in the tool bar and move the cursor down from F7
up to F13, and then click the paste menu in the tool bar. Compute the total fixed capital
investment by moving the cursor to column F, row 14 (Total Purchase Cost column,
total row), then clicking formula in the tool bar, clicking , moving the cursor to column
F6 down to F13, and pressing enter in the key pad.
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Under the Fixed Capital Investment worksheet, compute the annual depreciation of the
fixed capital items using the straight line method. The total annual depreciation figure
will be used in computing the return on investment (ROI). To compute the annual
depreciation of weighing scale, move the cursor to column G, row 6 (Annual
Depreciation column, weighing scale row), press the = sign in the key pad, move the
cursor to column F, row 6 (Total Purchase Cost column, weighing scale row), press the
/ sign (i.e., meaning divide) in the key pad, then move the cursor to column D, row 6
(Useful life column, weighing scale row). Press enter in the key pad.
To compute annual depreciation of other fixed capital items used in the coconut +
coffee enterprise, move the cursor to column G, row 6 (Annual Depreciation column,
weighing scale row), then click the copy menu in the tool bar, move the cursor down
from G7 up to G13, and click the paste menu in the tool bar.
Add the estimated annual depreciation of all the fixed capital items used in the coconut
+ coffee enterprise by moving the cursor to column G, row 14 (Annual Depreciation,
total row), then clicking formula in the tool bar, clicking , moving the cursor to G6, then
dragging the cursor down up to column G13, and finally pressing enter in the key pad.
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3.6 Determine and compute the residual value in the Fixed Capital Investment Schedule.
The residual or the salvage value of all the fixed capital items is zero or 0 because the
useful life of the fixed assets is either 5 or 10 years which is the same as the project
life.
4.0 In Appendix Table F.7 under the Financial & Sensit. Analyses worksheet, copra sales
figures from year 1 to year 10 are derived by linking to the Production worksheet. To
derive the copra sales figure in year 1, move the cursor to C6, press the = sign in the
key pad, move the cursor to B7 in the Production worksheet, press enter in the key
pad. To derive the copra sales figures in years 2 to 10, move the cursor to C6, click the
copy menu in the tool bar, move or drag the cursor to the right from D6 up to L6, and
click the paste menu in the tool bar.
Likewise, the coffee sales figures in Appendix Table F.7 are derived by linking to the
Production worksheet. To determine the coffee sales figure in year 1, move the cursor
to C7, press the = sign in the key pad, move the cursor to B18 in the Production
worksheet, press enter in the key pad. To derive the coffee sales figures in years 2 to
10, move the cursor to C7, click the copy menu in the tool bar, move or drag the cursor
to the right from D7 up to L7, and then click the paste menu in the tool bar.
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Input the residual value in year 10 in Appendix Table F.7 by linking to the Fixed Capital
Inv Schedule worksheet. Move the cursor to L8, press the = sign in the key pad, press
J17 under the Fixed Capital Inv. Schedule worksheet, and then press enter in the key
pad.
To compute total gross benefits in year 1 in Appendix Table F.7 under the Financial &
Sensit. Analyses worksheet, move the cursor to C9 (i.e., column C, row 9), press the
= sign in the key pad, then move the cursor to C6, press the + sign in the key pad,
move the cursor to C7, press the + sign in the key pad, move the cursor to C8, and
press enter in the key pad. Another method is to move the cursor to C9, click formula
in the tool bar, click the sign in the tool bar, move and drag the cursor from C6 down
to C8, and then press enter in the key pad. To determine the total gross benefits from
year 2 to year 10, move the cursor to C9, click the copy menu in the tool bar, move and
drag the cursor to the right from D9 to L9, and click the paste menu in the tool bar.
To input the fixed capital investment figure in year 1 in Appendix Table F.7 under the
Financial & Sensit. Analyses worksheet, move the cursor to C11, press the = sign in
the key pad, then move the cursor to J6 in the Fixed Capital Inv. Worksheet, and press
enter in the key pad. To input the fixed capital investment figure in year 6 in the same
appendix table under the Financial & Sensit. Analyses worksheet, move the cursor to
H11, press the = sign in the key pad, then move the cursor to J11 in the Fixed Capital
Inv. Worksheet, and press enter in the key pad.
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To input the production cost figure in year 1 in Appendix F.7 under the Financial &
Sensit. Analyses worksheet, move the cursor to C12, press the = sign in the key pad,
then move the cursor to B44 under the summarized material costs in the Material Costs
worksheet, press the + sign in the key pad, move the cursor to B38 under the
summarized labor costs in the Labor Costs worksheet, press the + sign in the key pad,
move the cursor to B7 under Other Production Cost worksheet, edit as follows 'Other
Production Cost'!$B$7 (i.e., insert $ before B and before 7), and press enter in the key
pad. To input the production cost figures from year 2 to year 10 in Appendix Table F.9
in the same worksheet, move the cursor to C12, click the copy menu in the tool bar,
move and drag the cursor to the right from D12 to L12, and click the paste menu in the
tool bar.
To compute total gross costs in year 1 in Appendix F.7 under the Financial & Sensit.
Analyses worksheet, move the cursor to C13, press the = sign in the key pad, then
move the cursor to C11, press the + sign in the key pad, move the cursor to C12, and
press enter in the key pad. Another method is to move the cursor to C13, click formula
in the tool bar, click in the tool bar, move the cursor to C11, drag the cursor down to
C12, and then press enter in the key pad. To determine the total gross costs from year
2 to year 10, move the cursor to C13, click the copy menu in the tool bar, move and
drag the cursor to the right from D13 to L13, and click the paste menu in the tool bar.
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To compute net benefits in year 1 In Appendix F.7 under the Financial & Sensit.
Analyses worksheet, move the cursor to C14, press the = sign in the key pad, then
move the cursor to C9, press the - sign in the key pad, move the cursor to C13, and
press enter in the key pad. To determine the net benefits from year 2 to year 10, move
the cursor to C14, click the copy menu in the tool bar, move and drag the cursor to the
right from D14 to L14, and then click the paste menu.
5.0 In Appendix Table F.7 under the Financial & Sensit. Analyses worksheet, compute the
discounted measures of financial viability under base assumptions using the Excel
program.
One of the discounted measures of financial viability is Net Present Value (NPV). NPV
can be calculated using the following formula:
In Appendix Table F.7, move the cursor to C15 (i.e., column C, row 15), type = NPV,
press the open parenthesis or ( sign in the key pad, type 0.22, press the comma or ,
sign in the key pad, then move the cursor to C14, left click the mouse and hold from
C14 to L14 to highlight the net benefit values. Release the mouse and then press the
close parenthesis or ) sign in the key pad. Press enter in the key pad. The estimated
NPV at 22% discount rate using the base assumptions is PhP 100,580.62. Since NPV
is positive or greater than 0, the project is financially viable based on the NPV criterion.
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Moreover, another measure of financial profitability is the internal rate of return (IRR).
IRR can be calculated using the following formula:
= IRR(NB1: NBt, r)
Using the yearly net benefits data in Appendix Table F.9, compute the internal rate of
return (IRR) as follows:
Move the cursor to C16 (i.e., column C, row 16), type = IRR, press the open parenthesis
sign or ( in the key pad, move the cursor to C14 and left click the mouse and hold from
C14 to L14 to highlight the net benefit values. Release the mouse, press the comma
or , sign in the key pad, and then type a guess discount rate (e.g., 0.50). Press the
close parenthesis or ) sign in the key pad and then press enter in the key pad. The
estimated IRR is 44.73% which is greater than the opportunity cost of capital (22%).
Hence, the project is financially viable based on the IRR criterion.
The third measure of financial profitability is the benefit-cost ratio (BCR). The steps in
computing BCR are as follows:
a. Compute the sum of the discounted gross benefits. Use the NPV formula above,
but instead of highlighting the net benefits figures, highlight the stream of gross
benefits.
Move the cursor to C17 (i.e., column C, row 17), type = NPV, press the open
parenthesis or ( sign in the key pad, type 0.22, press the comma or , sign, then
move the cursor to C9, left click the mouse and hold from C9 to L9 to highlight the
gross benefit values. Release the mouse and then press the close parenthesis or )
sign in the key pad. Press enter in the key pad.
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b. Compute the sum of the discounted gross costs. Use the NPV formula above, but
instead of highlighting the net benefits figures, highlight the stream of gross costs.
Move the cursor to C18 (i.e., column C, row 18), type = NPV, press the open
parenthesis or ( sign in the key pad, type 0.22, press the comma or , sign, then
move the cursor to C13, left click the mouse and hold from C13 to L13 to highlight
the gross cost values. Release the mouse and then press the close parenthesis or
) sign in the key pad. Press enter in the key pad.
c. Divide the sum of the discounted gross benefits estimated in step a by the sum of the
discounted gross costs in step b.
Move the cursor to C19 (i.e., column C, row 19), press the = sign in the key pad, move
the cursor to C17, press the / sign in the key pad, move the cursor to C18, and press
enter in the key pad.
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Hence, BCR = 1.22. This means that for every PhP 1.00 of gross cost incurred, PhP
1.22 of gross benefits are generated based on present values. Since BCR is greater
than 1.0, the project is financially viable based on BCR investment criterion.
6.0 Conduct sensitivity analysis. Using the data presented in the financial cash flow table
(Appendix Table F.7), sensitivity analysis of the coconut + coffee enterprise will be
illustrated using two scenarios: a) a 10% decrease in gross benefits or income; and b)
a 10% increase in gross costs.
a. Copy Appendix Table F.7 in the Financial and Sensit Analyses worksheet by
highlighting the entire table (i.e., starting from A3, drag the mouse down to A20, and
then to the right until the last cell, L20). Then, press the copy menu in the tool bar.
Move the cursor below this table to A28 and then press the paste menu in the tool bar.
b. Change the title number and title to: Appendix Table F.8. Sensitivity analysis of the
coconut + coffee enterprise, Davao: Scenario 1: 10% decrease in gross income.
c. Do not change the copied fixed capital investment and production cost figures in
Appendix Table F.8.
d. Delete the copra and coffee sales figures in Appendix Table F.8 starting from C6 to L6
and from C7 to L7. Dont delete the gross income figures since these were estimated
using a formula. Once the copra and coffee sales figures are changed, the gross
income figures will be automatically recalculated.
e. To compute the new copra sales figure in year 1, move the cursor to C28 in Appendix
Table F.8, then press the = sign in the key pad, move the cursor to C6 in Appendix
Table F.7, press the * sign in the key pad, and type 0.90. Then press enter in the key
pad. If there is a decrease in the original copra sales figure (v), use the following
formula to compute the new value (v*): = v *(1 - r) where r is the percentage rate of
decrease. To multiply using the Excel program, use *. Hence, the new value in C28
(i.e., 10% lower value) is computed as: = C6*(1 - .10) or = C6*.90. To change the copra
sales figures in other cells, move the cursor to C28, click the copy menu in the tool bar,
move the cursor to D28, drag the cursor to the right up to the last entry, L28, and then
click the paste menu in the tool bar.
f. To compute the new coffee sales figure in year 1, move the cursor to C29 in Appendix
Table F.8, then press the = sign in the key pad, move the cursor to C7 in Appendix
Table F.7, then press the * sign in the key pad, type 0.90. Then press enter in the key
pad. If there is a decrease in the original coffee sales (v), use the following formula to
compute the new value (v*): = v *(1 - r) where r is the percentage rate of decrease. To
multiply using the Excel program, use *. Hence, the new value in C29 (i.e., 10% lower
value) is computed as: = C7*(1 - .10) or = C7*.90. To change the coffee sales figures
in other cells, move the cursor to C29, click the copy menu in the tool bar, move the
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cursor to D29, drag the cursor to the right up to the last entry, L29, and then click the
paste menu in the tool bar. Fixed capital investment and production cost figures will
remain the same as in the base assumptions.
g. With changes in copra and coffee sales figures in Appendix Table F.8, new values of
gross benefits, net benefits, NPV, IRR and BCR will be automatically computed since
the NPV, IRR, and BCR are expressed in formulas. The new NPV figure is PhP
43,412.83. The new IRR figure is 31.71%, and the new BCR is 1.09. Hence, the project
will still be financially viable if there will be a 10% decrease in gross income.
a. Copy Appendix Table F.7 in the Financial and Sensit Analyses worksheet by
highlighting the entire table (i.e., starting from A3, drag the mouse down to A20, and
then to the right until the last cell, L20). Then, press the copy menu in the tool bar.
Move the cursor below this table to A47 and then press the paste menu in the tool bar.
b. Change the title number and title to: Appendix Table F.9. Sensitivity analysis of the
coconut + coffee enterprise, Davao: Scenario 2: 10% increase in gross costs.
c. Do not change the copied coconut sales, coffee sales, and gross benefits figures in
Appendix Table F.9.
d. Delete the copied figures under fixed capital investment and production cost rows in
Appendix Table F.9 starting from C55 to L55 and from C56 to L56.
e. Move the cursor to C55 in Appendix Table F.9, then press the = sign in the key pad,
move the cursor to C11 in Appendix Table F.7, then press the * sign in the key pad,
type 1.10. Then press enter in the key pad. For example, if there is an increase in the
original fixed capital investment figure (v), use the following formula to compute the
new value (v**): = v *(1 + r) where r is the percentage rate of increase. To multiply using
the Excel program, use *. Hence, the new fixed capital investment value in C55 (i.e.,
10% higher value) is computed as: = C11*(1 + .10) or = C11*1.10. To determine the
new fixed capital investment value in year 6 in Appendix Table F.9, move the cursor in
H55, press the = sign in the key pad, move the cursor to H11 in Table Appendix Table
F.7, then press the * sign in the key pad, type 1.10. Then press enter in the key pad.
159
f. To determine the new production cost figure in C56 in Appendix Table F.9, press the
= sign in the key pad, move the cursor to C11 in Appendix Table F.7, then press the *
sign in the key pad, type 1.10. Then press enter in the key pad. To change the
production cost figures in other cells, move the cursor to C56, press the copy menu in
the tool bar, move the cursor to D56 and drag to the right up to the last entry, L56, and
then click the paste menu in the tool bar.
g. With the change in the values under fixed capital investment and production costs in
Appendix Table F.9, new values of total gross costs, net benefits, NPV, IRR, and BCR
will be automatically computed since total gross costs, net benefits, NPV, IRR and BCR
are expressed in formulas. The new NPV figure is PhP 50,465.77. The new IRR figure
is 32.41%, and the new BCR is 1.10. Hence, the project will still be financially viable
based on the NPV, IRR, and BCR criteria. It can be noted that the project is less
sensitive to a 10% increase in gross costs as compared to the same percentage
decrease in gross benefits/income as evident from lower NPV, IRR, and BCR
estimates in the former sensitivity assumption as compared to the latter sensitivity
assumption.
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7.0 Conduct graphical analysis to show the sensitivity of FIRR to different risk situations
This section presents the steps in creating a column chart (i.e., "Clustered Column") to
show the sensitivity of IRR of the coconut + coffee enterprise to different risk situations.
To create the column chart, IRR estimates derived from Appendix Tables F.7, F.8, and
F.9 were used.
a. Copy the data shown above in the Graph worksheet, Highlight the cells under column
A (assumptions) and column B (IRR (%). Place the cursor in A2 (column A, row 2),
drag the mouse to the right up to B2, and down to B4.
b. Choose and press Insert in the tool bar, choose a chart type by pressing Column, then
under 2-D Column, choose and press Clustered Column sub-type.
c. If you want to show the IRR figures in the graph, press layout in the chart tool bar, then
choose and click data label from the options, and finally click outside end option.
d. To insert the vertical axis title in the graph, select and click axis title. Under axis title,
choose and click vertical axis title. Among the options, choose and click horizontal title
and then type IRR (%) inside the vertical axis title box.
e. To insert the horizontal axis title in the graph, select and click axis title in the chart tool
bar. Choose and click horizontal axis title. Among the options, choose and click title
below the axis. Then type assumptions inside the horizontal axis title box.
f. Under "chart tool options", click chart title", then click above chart. Type the figure title
in the chart title box (e.g., Figure F.1. Results of the sensitivity analysis showing the
changes in IRR under the base assumptions and risk scenarios, coconut + coffee
enterprise, Davao, 2016). However, in the chart example below, the chart or figure title
is shown below the graph.
50 44.73
40 31.71 32.41
30
IRR (%)
20
10
0
Base assumptions 10% Decrease in Gross !0% Increase in Gross Costs
Income
Assumptions
Figure F.1. Results of sensitivity analysis showing the changes in IRR under the base
assumptions and risk scenarios, coconut + coffee enterprise, Davao,
2016
Interpretation:
Under the base assumptions, the coconut + coffee enterprise is financially viable since
the estimated IRR (44.73%) is greater than the opportunity cost of capital (i.e.,
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22%/year). To determine the effects of risk factors on the financial viability of the
project, sensitivity analysis was conducted using two scenarios: 1) a 10% decrease in
gross income from coconut and coffee; and 2) a 10% increase in gross costs. Results
of the sensitivity analysis showed that the project is more sensitive to a decrease in
gross income than to an increase in gross costs. The estimated IRR if gross income
will decrease by 10% will be 31.71%. On the other hand, if gross costs will increase by
10%, IRR will decrease to 32.41%, but the IRR is higher than that when there is a
decrease in gross income by the same percentage.
In the Financial and Sensit Analysis worksheet, move the cursor to C72, press the =
sign in key pad, move the cursor to C15 in Appendix Table F.7 to copy the NPV under
base assumptions (i.e., NPVb), then press enter in the key pad. Move the cursor to
C73, press the = sign in key pad, move the cursor to C37 in Appendix Table F.8 to
copy the NPV under case 1 (i.e., NPV1), then press enter in the key pad. Compute the
difference between NPVb and NPV1 by moving the cursor to E72, pressing the = sign,
moving the cursor to C72, pressing the sign in the key pad, moving the cursor to C73,
and then pressing enter in the key pad.
Let Vb = 1.0 (meaning 100% original gross income figures under the base situation);
under cell C74
V1 = 0.9 (meaning 90% of the original values of gross income after the 10% decrease
in gross income); under C75
Compute the difference between Vb and V1 by moving the cursor to E74, pressing the
= sign, moving the cursor to C74, pressing the sign in the key pad, moving the cursor
to C75, and then pressing enter in the key pad.
Compute the switching value for a change in gross income by moving the cursor to
C76, pressing the = sign in the key pad, typing 100, pressing open parenthesis or (
sign in the key pad, moving the cursor to C72, pressing the / sign in the keypad, moving
the cursor to E72, pressing the close parenthesis or ) sign in the key pad, pressing the
* sign in the keypad, pressing open parenthesis or ( sign in the key pad, moving the
cursor to E74, pressing the / sign in the keypad, moving the cursor to C74, pressing
the close parenthesis or ) sign in the key pad, and then pressing enter in the key pad.
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The estimated switching value is 17.59%. This means that NPV will become zero (or
IRR will be equal to the opportunity cost of capital or the discount rate of 22%, or the
BCR = 1) if gross income will decrease by 17.59%. A decrease in gross income by
more than 17.59% will result in a negative NPV and will make the proposed coconut +
coffee investment project unprofitable.
In the Financial and Sensit Analysis worksheet, move the cursor to C102, press the =
sign in key pad, move the cursor to C15 in Appendix Table F.7 to copy the NPV under
base assumptions (i.e., NPVb), then press enter in the key pad. Move the cursor to
C103, press the = sign in key pad, move the cursor to C59 in Appendix Table F.9 to
copy the NPV under case 2 (i.e., NPV2), then press enter in the key pad. Compute the
difference between NPVb and NPV2 by moving the cursor to E102, pressing the = sign,
moving the cursor to C102, pressing the sign in the key pad, moving the cursor to
C103, and then pressing enter in the key pad.
Let Vb = 1.0 (meaning 100% original gross cost figures under the base situation); under
cell C104
V2 = 1.1 (meaning 110% of the original gross cost figures after the 10% increase in
gross costs); under C105
Compute the difference between Vb and V2 by moving the cursor to E104, pressing the
= sign, moving the cursor to C104, pressing the sign in the key pad, moving the cursor
to C105 (disregard the negative sign of this cell), and then pressing enter.
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Compute the switching value for a change in gross costs by moving the cursor to C106,
pressing the = sign in the key pad, typing 100, pressing open parenthesis or ( sign in
the key pad, moving the cursor to C102, pressing the / sign in the key pad, moving the
cursor to E102, pressing the close parenthesis or ) sign in the key pad, pressing the *
sign in the key pad, pressing open parenthesis or ( sign in the key pad, moving the
cursor to E104, pressing the / sign in the key pad, moving the cursor to C104, pressing
the close parenthesis or ) sign in the key pad, and then pressing enter in the key pad.
The estimated switching value is 20.07%. This means that NPV will become zero (or
IRR will be equal to the opportunity cost of capital or the discount rate of 22%, or the
BCR = 1) if gross costs will increase by 20.07%. An increase in gross costs by more
than 20.07% will result in a negative NPV and will make the proposed coconut + coffee
investment project unprofitable.
9.0 Compute the undiscounted measures of project worth (i.e., payback period and the
return on investment (ROI)
Under the Financial & Sensit Analyses worksheet, move the cursor to C140 (i.e., column
C, row 140), press the = sign in the key pad, move the cursor in C9 in Appendix Table
F.7 to copy gross income (i.e., sum of coconut and coffee sales) in year 1, then press
enter in the key pad. To input the annual gross income in other years, move the cursor
to C140, click the copy menu in the tool bar, move and drag the cursor to the right from
D140 to L140, then click the paste menu in the tool bar.
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Under the Financial & Sensit Analyses worksheet, move the cursor to C141, press the
= sign in the key pad, then move the cursor to B44 under Material Costs worksheet,
press + sign, move the cursor to B38 under Labor Cost worksheet, and press enter in
the key pad to compute total variable cost in year 1. To input the total variable costs in
years 2-10, move the cursor to C141, click the copy menu in the tool bar, move and
drag the cursor to the right from D141 to L141, then click the paste menu in the tool
bar.
To compute annual gross margin in year 1, move the cursor to C142, press the = sign
in the key pad, move the cursor to C140, press the (minus) sign in the key pad, move
the cursor to C141, and then press enter in the key pad. To compute the annual gross
margin in years 2 to 10, move the cursor to C142, press the copy menu in the tool bar,
move and drag the tool bar to the right from D142 to L142, and then press the paste
menu in the tool bar.
b. The annual gross margin in years 1 and 2 are negative. Positive gross margin is
realized in year 3 (PhP 52,112.27). Compute the cumulative gross margin from year 1
to year 3 by adding the annual gross margin from year 1 to year 3. Move the cursor to
E143, click formula in the tool bar, click the sign in the tool bar, then move the cursor
from C142 to E142, and then press enter in the key pad. The cumulative sum of the
annual gross margin from year 1 to year 3 is PhP 31,751.57.
c. Copy the initial fixed capital investment figure from C33 in Appendix Table F.7. Move
the cursor to C144, press the = sign in the key pad, move the cursor to C33, then press
enter in the key pad.
165
d. Compute the monthly cumulative gross margin in year 3 by dividing this cumulative
gross margin in year 3 by 12. Move the cursor to D151, press the = sign in the key pad,
move the cursor to D150, press the / sign in the key pad, type 12, and press enter in
the key pad. The cumulative gross margin per month in year 3 is PhP 2,645.96.
e. Determine the number of months in year 3 to recover the fixed capital investment by
dividing the fixed capital investment (i.e., PhP 18,220.00) by the average cumulative
monthly gross margin in year 3 (i.e., PhP 2,645.96). Move the cursor to C152, press
the = sign, move the cursor to C145, press the / sign, move the cursor to C151, press
enter in the key pad.
a. Compute the average annual gross income (sum of coconut and coffee sales) covering
years 1-10. Move the cursor to C130, press the = sign, type average, press the open
parenthesis or ( sign in the key pad, move the cursor to C6 in Appendix Table F.7,
move or drag the cursor to the right to L6, press the close parenthesis or ) sign in the
key pad, press the + sign in the key pad, type average, press the open parenthesis or
( sign in the key pad, move the cursor to C7, move or drag the cursor to the right up to
L7, press the close parenthesis or ) sign in the key pad, and then press enter in the key
pad.
166
b. Compute the average annual production costs covering years 1-10. Move the cursor
to C131, press the = sign, type average, press the open parenthesis or ( sign in the
key pad, move the cursor to D12 in Appendix F.7 and drag the cursor to the right up to
L12, press the close parenthesis or ) sign in the key pad, and then press enter in the
key pad.
c. Copy the depreciation figure under the Fixed Capital Investment worksheet. Move the
cursor to C132, press the = sign in the key pad, move the cursor to G14 (column G,
row 14) under the Fixed Capital Investment worksheet, and then press enter in the key
pad.
Average annual net income = Ave. annual gross income Ave. production costs Annual
depreciation
Move the cursor to C133, press the = sign in the key pad, move the cursor to C130,
press the sign in the key pad, move the cursor to C131, press the sign in the key
pad, move the cursor to C132, press enter in the key pad.
167
f. Copy the initial fixed capital investment in Appendix Table F.7. Move the cursor to C134,
press the = sign in the key pad, move the cursor to C11 in Appendix Table F.7, and
then press enter in the key pad.
Move the cursor to C135, press the = sign in the key pad, move the cursor to C134,
press the / sign in the key pad, move the cursor to C133, press the * sign in the key
pad, type 100, and then press enter in the key pad.
The project is financially viable based on the ROI criterion because the estimated
ROI of 325.08% is higher than 50%.
Reference
Canja, Liberty and Severino Magat. 2006. Coconut Intercropping Guide No. 6: Coconut-
Coffee (Excelsa) Cropping Model. Philippine Coconut Authority (PCA), Research &
Development and Extension Branch, Diliman, Quezon City, 10 pp.
168
APPENDIX G
FINANCIAL AND SENSITIVITY ANALYSES OF
UBI POWDER PROCESSING ENTERPRISE
The assumptions used in conducting financial and sensitivity analyses of ubi powder
processing enterprise were based on the technical and economic data provided by the
Department of Agriculture-Bureau of Agricultural Research. As mentioned earlier, the
technology developer of ubi powder is Dr. Teodora M. De Villa from the Food Science
Cluster, College of Agriculture, University of the Philippines Los Baos. The same data
used in conducting Cost and Returns Analysis of the Ubi Powder Processing
Enterprise shown in Appendix B were used in the financial and sensitivity analyses of
the afore-mentioned enterprise as shown below (i.e., Appendix G.1 Appendix G.7).
Using the data on the cost and useful life of each fixed capital investment item from
the Fixed Capital Investment worksheet, the Fixed Capital Investment Schedule
worksheet was created to estimate the fixed capital investment items that will be
purchased in other years and the residual/terminal value of the remaining fixed capital
items (Appendix Table G.8).
Appendix Table G.1. Annual production and selling price of ubi powder, Laguna,
2008
Daily Monthly Annual Selling
Productiona Productionb Productionc Price
(Packs) (Packs) (Packs) (PhP/pack)
1,000 22,000 176,000 40.00
a
One kilogram of fresh ubi yields approximately 0.17 kilogram of ubi powder.
b
22 working days per month
c
8 months of operation per year or 176 days of operation per year
Appendix Table G.2. Raw material and packaging materials in ubi powder
processing and buying prices, Laguna, 2008
Daily
Monthly Annual Price/
Type of Raw and Packaging Materials Unit Require-
Require- Require- Unit
ment
ment ment (PhP)
Ubi (raw) kg 588 12,936 103,488 11
Packaging materials
Primary kg 1.9 41.8 334.4 100
Secondary box 1,000 22,000 176,000 3
169
Appendix Table G.3. Estimated labor requirement and wages/salaries in ubi
powder processing, Laguna, 2008
Daily Monthly Annual Daily Monthly
No. of
Position Labor Labor Labor Wage Salary
Workers (PhP)
(md) (md) (md) (PhP)
Direct labora 10 10 220 1,760 250
Administrative
Plant managera 1 1 22 176 12,540
a 1 1 22 176 5,500
Clerk-typist
a 1 1 22 176 6,600
Driver-mechanic
a 1 1 22 176 5,500
Utility worker
Driver for 1 1 16 128 250
product
Distributionb
a
Assumed 176 man-days of labor per year for 8 months of operation per year
b
Driver for distribution refers to labor in hauling, loading, and delivering products to
target buyers at 128 haulings/distribution per year
Note: Direct labor and driver for product distribution are paid on a daily basis; the
rest are paid on a monthly basis
Appendix Table G.4. Other operating, business, selling and administrative costs
in ubi powder processing, Laguna, 2008
Cost/Unit Total Cost
Item Quantity Unit
(PhP) (PhP)
Other Operating, Business, Selling and Administrative Costs
Fuel and oil 1,920.00 liters 45.00
Electricity 17,000.00 kwh 6.63
3
Water 3,080.00 m 26.31
Permits and licensesa 16,000.00
Insuranceb 100,638.00
Realty taxc 26,000.00
Other laboratory/plant supplies 184,000.00
Market promotiond 140,800.00
Other Administrative Costs
Office supplies 21,159.00
a
Permits and licenses include mayor's permit, BIR registration, DTI, business taxes, etc.
b
2% of insurable assets (production equipment, building, vehicle, etc.)
c
2% of the assessed value of building and land
Assessed value of building = 0.8 x PhP1,500,000 (market value) = 1,200,000.00
Assessed land value =0.5 x PhP 200,000 (market value) = 100,000.00
Realty tax = (PhP1,200,000 + PhP100,000) x .02 tax levy = 26,000.00
d
Assumed to be 2% of annual sales or gross income
170
Appendix Table G.5. Repair and maintenance expenses in ubi powder
processing, Laguna, 2008
Repair and Maintenance Cost Annual Cost Repairs and Maintenance
Item (PhP) Cost (PhP)
Buildinga 1,500,000.00 75,000.00
Equipmentb 2,806,900.00 280,690.00
Vehiclec 375,000.00 7,500.00
a
5% of acquisition cost
b
10% of acquisition cost
c
2% of acquisition cost
Appendix Table G.6. Imputed land charge in ubi powder processing, Laguna,
2008
Cost Item Annual Cost (PhP)
Land charge a 14,000.00
a
Land purchase cost (PhP220,000) multiplied by interest on long-term savings (i.e.,
one-year time deposit of 7% per year)
171
Cost/Unit
Fixed Capital Investment Item Quantity Unit Useful Life (Years)
(PhP)
Office Equipment
Air conditioning unit, 2 hp 1 unit 10 25,000.00
Refrigerator, 10 cu. ft. 1 unit 10 20,000.00
Computer/Printer and accessories 1 unit 5 50,000.00
Computer table with chair 1 set 10 5,000.00
Wall clocks 2 unit 5 1,000.00
Office table 2 unit 10 5,000.00
Office chairs 6 unit 10 1,000.00
Filing Cabinet 1 unit 10 10,000.00
Bundy clock 1 unit 10 18,000.00
Electric Standard fan 2 unit 10 2,000.00
1. The project life is 10 years, but actual business operation will commence in the second
year since the first year will be devoted to the construction of the processing
plant/laboratory and the purchase of plant/laboratory equipment, office equipment,
delivery van, and the 200-sq m land where the processing plant/laboratory will be
situated.
2. The discount rate is assumed to be 22%, the prevailing bank lending rate since it is
assumed that the only source of project funds will be loans. If both borrowed and equity
capital will be the sources of project funds, then the weighted average cost of capital
should be used as the discount rate.
3. The use of constant prices was the analytical approach applied in conducting financial
analysis of the ubi powder processing enterprise. Hence, the estimated ubi powder
sales from year 2 to year 10 will be the same. Likewise, the operating and maintenance
costs, and the selling and administrative costs will be the same from year 1 to year10.
172
D. Steps in Conducting Financial Analysis of Ubi Powder Processing Enterprise, 10
Years of Operation
1. Prepare an Excel spreadsheet with the following worksheet titles: Production, Raw &
Packaging Material Costs, Labor Costs, Other Operating and Admin Costs, Repairs &
Main. (i.e., Maintenance) Costs, Land Charge, Fixed Capital Investment, Fixed Capital Inv.
(i.e., Investment) Schedule, and Financial & Sensit (i.e., Sensitivity) Analyses.
2. Copy the data from Appendix Table G.1, Appendix Table G. 2, Appendix Table G.3,
Appendix Table G.4, Appendix Table G.5, Appendix Table G.6, Appendix Table G.7, and
Appendix Table G.8 to the Production worksheet, Raw and Packaging Material Costs
worksheet, Labor Costs worksheet, Other Operating and Admin Costs worksheet, Repairs
& Main. Costs worksheet, Land Charge worksheet, Fixed Capital Investment worksheet,
and Fixed Capital Inv. Schedule worksheet, respectively.
3. In the Production worksheet, compute gross income or sales of ubi powder and
estimate the costs in the other worksheets.
a. Under the Production worksheet, compute annual gross income from the sales of ubi
powder by multiplying annual ubi powder production by the selling price of ubi powder
per pack. To compute annual gross income from ubi powder, move the cursor to
column E, row 6 (Annual Gross Income/Sales, row 6), press the = sign in the key pad,
then move the cursor to column C, row 6 (Annual Ubi Powder Production, row 6), press
the * sign in the key pad, and finally move the cursor to column D, row 6 (Selling Price
Per Pack, row 6), then press enter in the key pad.
173
b. Under the Raw and Packaging Material Costs worksheet, compute the cost of each
raw and packaging material input by multiplying the quantity of raw or packaging
material used by its unit price.
To compute the annual cost of raw material (i.e., ubi) used, move the cursor to column
G, row 6 (Total Annual Cost column, ubi row), press the = sign in the key pad and then
move the cursor to column E, row 6 (Annual Requirement column, ubi row). Press the
* sign in the key pad, and move the cursor to column F, row 6 (Price or Cost/unit
column, ubi row), and finally press enter in the key pad. To compute the annual costs
of the primary and secondary packaging materials, move the cursor to column G, row
6 (Total Annual Cost column, ubi row), then click copy in the tool bar and move the
cursor down from column G, row 8 up to column G, row 9. Then click paste in the tool
bar. Add all the estimated annual raw and packaging material costs by moving the
cursor to column G, row 10 (Total Annual Cost column, total row), then click formula in
the tool bar, click , move the cursor to column G, row 6 down to column G, row 9 and
press enter in the key pad.
174
c. Under the Labor Cost worksheet, compute the annual labor cost for direct labor and
for hiring a driver for product distribution by multiplying annual labor use in man-days
by the daily wage rate.
To compute the direct labor cost, move the cursor to column H, row 6 (Annual Labor
Cost column, direct labor row), press the = sign in the key pad, move the cursor to
column E, row 6 (Annual Labor Use column, direct labor row). Press the * sign in the
key pad, and move the cursor to column F, row 6 (Daily Wage Rate column, direct
labor row). Press enter in the key pad. To compute the annual labor cost for hiring a
driver for product distribution, move the cursor to column H, row 12 (Annual Labor Cost
column, driver for product distribution row), press the = sign in the key pad, move the
cursor to column E, row 12 (Annual Labor Use column, driver for product distribution
row). Press the * sign in the key pad, and move the cursor to column F, row 12 (Daily
Wage Rate column, driver for product distribution row). Press enter in the key pad.
To compute the annual labor cost for each administrative personnel who is paid
monthly, multiply the number of worker hired by the monthly salary and multiply again
by 8 since there are 8 months of ubi powder processing operation per year. For
example, to compute the annual labor cost of hiring a plant manager, move the cursor
to column H, row 8 (Annual Labor Cost column, plant manager row), press the = sign
in the key pad, move the cursor to column B, row 8 (Number of Workers column, plant
manager row), press the * sign in the key pad, and move the cursor to column G, row
8 (Monthly Salary column, plant manager row), press the * sign in the key pad, then
press 8 in the key pad, and finally press enter in the key pad. To compute the annual
labor cost of hiring other administrative personnel (i.e., clerk typist, driver mechanic,
and utility worker) who are paid monthly, move the cursor to column H, row 8 (Annual
labor cost column, plant manager row), then click copy in the tool bar and move the
cursor down from column H, row 9 up to column H, row 11. Then click paste in the tool
bar.
175
Under the sub-total row, add the estimated annual labor costs for all administrative
personnel by moving the cursor to column H, row 13 (Annual Labor Cost column, sub-
total row), then click formula in the tool bar, click , move the cursor to column H, row
8 down to column H, row 12 and press enter in the key pad. Under total row, add the
direct labor cost and the total administrative labor cost by moving the cursor to column
H, row 14 (Annual Labor Cost column, total row), pressing the = sign in the key pad,
moving the cursor to column H, row 6 (Annual Labor Cost column, plant manager row),
pressing the + sign in the key pad, moving the cursor to column H, row 13 (Annual
Labor Cost column, sub-total row), and then pressing enter in the key pad.
176
d. Under the Other Operating and Admin Costs compute the annual cost of fuel and oil
used by moving the cursor to column E, row 5 (Total Cost column, fuel and oil row),
pressing the = sign in the key pad and then moving the cursr to column B, row 5
(Quantity column, fuel and oil row). Press the * sign in the key pad, and move the cursor
to column D, row 5 (Cost/unit column, fuel and oil row), and finally press enter in the
key pad. To compute the annual costs of utilities (i.e., electricity and water), move the
cursor to column E, row 5 (Total Cost column, fuel and oil row), then click copy in the
tool bar and move the cursor down from column E, row 6 (Total Cost column, electricity
row) up to column E, row 7 (Total Cost column, water charge row). Then click paste in
the tool bar.
Compute the sub-total for all the other operating, business and selling cost items by
moving the cursor to column E, row 13 (Total Cost column, sub-total row for other
operating, business and selling costs), then clicking formula in the tool bar, clicking ,
moving the cursor to column E, row 5 down to column E, row 12 and pressing enter in
the key pad.
Compute the sub-total for other administrative costs by moving the cursor to column E,
row 16 (Total Cost column, sub-total row for other administrative costs), then pressing
the = sign in the key pad, moving the cursor to column E, row 15 (Total Cost column,
office supplies row), and then pressing enter in the key pad.
Compute the total other operating, business, selling and administrative costs. Move the
cursor to column E, row 17 (Total Cost column, total row), press the = sign in the key
pad, move the cursor to column E, row 13 (Total Cost column, sub-total row for other
operating, business and selling costs), press the + sign in the key pad, move the cursor
to column E, row 16 (Total Cost, sub-total row for other administrative costs), and then
press enter in the key pad.
177
e. Under the Repairs and Maintenance worksheet, compute the building repairs and
maintenance cost by moving the cursor to column C row 5 (Repairs & Maintenance
Cost column, building row), pressing the = sign in the key pad, moving the cursor to
column B, row 5 (Total Cost column, building row), pressing the * sign in the key pad,
typing 0.05 and then pressing enter in the key pad. It is assumed that the annual repairs
and maintenance cost of the processing building is 5% of the total cost of the building.
To compute the equipment repairs and maintenance cost, move the cursor to column
C row 6 (Repairs & Maintenance Cost column, equipment row), press the = sign in the
key pad, moving the cursor to column B, row 6 (Total Cost column, equipment row),
178
press the * sign in the key pad, type 0.10, and then press enter in the key pad. It is
assumed that the annual equipment repairs and maintenance cost is 10% of the total
cost of equipment.
To compute the vehicle repairs and maintenance cost, move the cursor to column C
row 7 (Repairs & Maintenance Cost column, vehicle row), press the = sign in the key
pad, move cursor to column B, row 7 (Total Cost column, vehicle row), press the * sign
in the key pad, type 0.02 and then press enter in the key pad. It is assumed that the
repairs and maintenance cost of the vehicle is 2% of the total cost of the vehicle.
Compute the total repairs and maintenance cost. Move the cursor to column C, row 8
(Repairs & Maintenance Cost column, total row), then click formula in the tool bar, click
, move the cursor to column C, row 5 down to column C, row 7, and press enter in the
key pad.
f. Under Fixed Capital Investment worksheet, compute the total land cost by multiplying
cost per square meter by the land area in square meters. Under column F, row 5 (Total
Cost column, land row), press the = sign in the key pad, move the cursor to column B,
row 5 (Quantity column, land row), press the * sign in the key pad, and then move the
cursor to column E, row 5 (Purchase Cost/unit column, land row). Press enter in the
key pad.
To compute the total costs of other fixed capital items used in ubi powder processing,
move the cursor to column F, row 5 (Total Purchase Cost column, land row row), then
click copy in the tool bar and move the cursor down from column F, row 6 up to column
F, row 28, and then click paste in the tool bar. Compute the sub-total row (i.e., row 29)
consisting of land, building, delivery van, plant equipment, and laboratory equipment)
by moving the cursor to column F, row 29 (Total Purchase Cost column, sub-total row),
then clicking formula in the tool bar, clicking , moving the cursor to column F, row 5
down to column F, row 28 and pressing enter in the key pad.
179
180
Under office equipment in the Fixed Capital Investment worksheet, compute the total
purchase cost of the air conditioning unit by multiplying the quantity by the purchase
cost per unit. This is done by moving the cursor to column F, row 31 (Total Purchase
Cost column, air conditioning unit row), pressing the = sign in the key pad, moving the
cursor to column B, row 31 (Quantity column, air conditioning row), pressing the * sign
in the key pad, and then moving the cursor to column E, row 31 (Purchase Cost/unit
column, air conditioning unit row). Press enter in the key pad.
To compute the total costs of other office equipment, move the cursor to column F, row
31 (Total Purchase Cost column, air conditioning unit row), then click copy in the tool
bar and move the cursor down from column F, row 32 up to column F, row 40, and then
click paste in the tool bar. Compute the sub-total row (i.e., row 41) for all office
equipment by moving the cursor to column F, row 41 (Total Purchase Cost column,
sub-total row), then clicking formula in the tool bar, clicking , moving the cursor to
column F, row 31 down to column F, row 40 and then pressing enter in the key pad.
181
Compute the total purchase cost of all the fixed capital items by adding the sub-total of
the fixed capital items used in ubi powder processing and the sub-total of all the office
equipment. Move the cursor to column F, row 42 (Total Purchase Cost column, row
total), press the = sign in the key pad, move the cursor to column F, row 29 (Total
Purchase Cost column, row sub-total of the fixed capital items used in ubi powder
processing), press the + sign in the key pad, move the cursor to column F, row 41
(Total Purchase Cost Column, sub-total row for office equipment), and the press enter
in the key pad.
182
Under the Fixed Capital Investment worksheet, compute the annual depreciation of
fixed capital items excluding land by assuming zero salvage value and by using the
straight line method. To compute the annual depreciation of building, move the cursor
to column G, row 6 (Annual Depreciation column, building row), press the = sign in the
key pad, move the cursor to column F, row 6 (Total Purchase Cost column, building
row), press the / sign (i.e., meaning divide) in the key pad, then move the cursor to
column D, row 6 (Useful life column, building row). Press enter in the key pad.
To compute the annual depreciation of other fixed capital items used in processing ubi
powder, move the cursor to column G, row 6 (Annual Depreciation column, building
row), then click copy in the tool bar, move the cursor down from column G, row 7
(Annual depreciation column, delivery van row) down to column G, row 28 (Annual
Depreciation column, moisture meter row), and click paste in the tool bar. Add the
estimated annual depreciation of all the fixed capital items used in ubi powder
processing by moving the cursor to column G, row 29 (Annual Depreciation, sub-total
row), then clicking formula in the tool bar, clicking , moving the cursor to column G,
row 6 down to column G, row 28 and finally pressing enter in the key pad.
Under office equipment in the Fixed Capital Investment worksheet, compute the annual
depreciation of the air conditioning unit. Move the cursor to column G, row 31 (Annual
Depreciation column, air conditioning unit row), press the = sign in the key pad, move
the cursor to column F, row 31 (Total Purchase Cost column, air conditioning unit row),
press the / sign in the key pad, then move the cursor to column D, row 31 (Useful life
column, air conditioning unit row). Press enter in the key pad.
183
184
To compute the annual depreciation of other office equipment, move the cursor to
column G, row 31 (Annual Depreciation column, aircondition unit row), then click copy
in the tool bar, move the cursor down from column G, row 32 (Annual depreciation
column, refrigerator row) down to column G, row 40 (Annual Depreciation column,
standard electric fan row), and click paste in the tool bar. Add the estimated annual
depreciation of all the office equipment items by moving the cursor to column G, row
41 (Annual Depreciation, sub-total row), then click formula in the tool bar, click , move
the cursor to column G, row 31 down to column G, row 40 and press enter in the key
pad.
Compute the total depreciation of all the fixed capital items by moving the cursor to
column G, row 42 (Annual Depreciation column, total row), pressing the = sign in the
key pad, moving the cursor to column G, row 29 (Annual Depreciation column, sub-
total row for fixed assets used in ubi powder processing), pressing the + sign in the key
pad, moving the cursor to column G, row 41 (Annual Depreciation column, sub-total
row for all office equipment), and then pressing enter in the key pad.
185
4. Under the Financial & Sensit. Analyses worksheet, the ubi powder sales and total gross
income figures in year 1 are zero (i.e., 0) because it was assumed that ubi processing
186
operation would start in year 2. Input the ubi powder sales figure in year 2 by linking to
the Production worksheet. Under the Financial & Sensit. Analyses worksheet, move
the cursor to D6 (i.e., column D, row 6), press the = sign in the key pad, then move the
cursor to E6 in the Production worksheet, and press enter in the key pad. To determine
the ubi powder sales from year 3 to year 10, move the cursor to D6, click the copy
menu in the tool bar, move and drag the cursor to the right from E6 to L6, click paste
in the tool bar, and press enter in the key pad.
Input the residual value in year 10 by linking to the Fixed Capital Investment Schedule.
Move the cursor to L7, press the = sign in the key pad, press G15 under the Fixed
Capital Inv. worksheet, and then press enter in the key pad.
To compute total gross benefits in year 1 in the Financial & Sensit. Analyses worksheet,
move the cursor to C8 (i.e., column C, row 8), press the = sign in the key pad, then
type SUM(C6:C7) and press enter in the key pad. To determine the total gross benefits
from year 2 to year 10, move the cursor to C8, click the copy menu in the tool bar,
move and drag the cursor to the right from D8 to L8, click paste in the tool bar, and
press enter in the key pad.
To input the fixed capital investment figure in year 1 in the Financial & Sensit. Analyses
worksheet, move the cursor to C10, press the = sign in the key pad, then move the
cursor to G5 in the Fixed Capital Inv. Worksheet, and press enter in the key pad. To
input the fixed capital investment figure in year 6 in the Financial & Sensit. Analyses
worksheet, move the cursor to H10, press the = sign in the key pad, then move the
cursor to G10 in the Fixed Capital Inv. Worksheet, and press enter in the key pad.
187
To input the processing cost figure (i.e., includes operating and business costs) in year
2 in the Financial & Sensit. Analyses worksheet, move the cursor to D11, press the =
sign in the key pad, then move the cursor to G10 in the Raw & Packaging Material
Costs worksheet, press the + sign in the key pad, move the cursor to H6 in the Labor
Costs worksheet, press the + sign in the key pad, move the cursor to E13 in the Other
Operating and Admin Costs worksheet, press the sign in the key pad, move the
cursor to E12 in the Other Operating and Admin Costs worksheet, press the + sign in
the key pad, move the cursor to C8 in the Repairs & Maintenance Costs worksheet,
and press enter in the key pad. To input the processing cost figures from year 3 to year
10 in the Financial & Sensit. Analyses worksheet, move and drag the cursor to the right
from E11 to L11, and press enter in the key pad.
To input the selling and administrative cost figure in year 2 in the Financial & Sensit.
Analyses worksheet, move the cursor to D12, press the = sign in the key pad, then
move the cursor to H13 in the Labor Costs worksheet, press the + sign in the key pad,
move the cursor to E12 in the Other Operating and Admin Costs worksheet, press the
+ sign in the keypad, move the cursor to E16 in the Other Operating and Admin Costs
worksheet, and press enter in the key pad. To input the selling and administrative cost
figures from year 2 to year 10 in the Financial & Sensit. Analyses worksheet, move and
drag the cursor to the right from E12 to L12, and press enter in the key pad.
188
To compute the total gross costs in year 1 in the Financial & Sensit. Analyses
worksheet, move the cursor to C13, type =SUM(C10:C12) and press enter in the key
pad. Alternatively, you may press the = sign in the key pad, then move the cursor to
C10, press the + sign in the key pad, move the cursor to C11, press the + sign in the
key pad, move the cursor to C12, and press enter in the key pad. To determine the
total gross costs from year 2 to year 10, move the cursor to C13, click the copy menu
in the tool bar, move and drag the cursor to the right from D13 to L13, click paste in the
tool bar, and press enter in the key pad.
To compute the net benefits in year 1 in the Financial & Sensit. Analyses worksheet,
move the cursor to C14, press the = sign in the key pad, then move the cursor to C8,
press the - sign in the key pad, move the cursor to C13, and press enter in the key pad.
To determine the net benefits from year 2 to year 10, move the cursor to C14, click the
copy menu in the tool bar, move and drag the cursor to the right from D14 to L14, click
paste in the tool bar, and press enter in the key pad.
5. In Appendix Table G.9 under the Financial & Sensit. Analyses worksheet, compute the
discounted measures of financial viability under base assumptions using the Excel
program.
One of the discounted measures of financial viability is Net Present Value (NPV). NPV
can be calculated using the following formula:
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= NPV(r, NB1: NBt)
In Appendix Table G.9, move the cursor to C15 (i.e., column C, row 15), type = NPV,
press the open parenthesis or ( sign in the key pad, type 0.22, press the comma or ,
sign in the key pad, then move the cursor to C14, left click the mouse and hold from
C14 to L14 to highlight the net benefit values. Release the mouse and then press the
close parenthesis or ) sign in the key pad. Press enter in the key pad. The estimated
NPV at 22% discount rate using the base assumptions is PhP6,803,907.54. Since NPV
is positive or greater than 0, the project is financially viable based on the NPV criterion.
Moreover, another measure of financial profitability is the internal rate of return (IRR).
IRR can be calculated using the following formula:
= IRR(NB1: NBt, r)
Using the yearly net benefits data in Appendix Table G.9, compute the internal rate of
return (IRR) as follows:
Move the cursor to C16 (i.e., column C, row 16), type = IRR, press the open parenthesis
sign or ( in the key pad, move the cursor to C14 and left click the mouse and hold from
C14 to L14 to highlight the net benefit values. Release the mouse, press the comma
or , sign in the key pad, and then type a guess discount rate (e.g., 0.50). Press the
close parenthesis or ) sign in the key pad and then press enter in the key pad. The
estimated IRR is 68.79% or approximately 68.8% which is greater than the opportunity
cost of capital (22%). Hence, the project is financially viable based on the IRR criterion.
The third measure of financial profitability is the benefit-cost ratio (BCR). The steps in
computing BCR are as follows:
d. Compute the sum of the discounted gross benefits. Use the NPV formula above,
but instead of highlighting the net benefits figures, highlight the stream of gross
benefits.
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Move the cursor to C17 (i.e., column C, row 17), type = NPV, press the open
parenthesis or ( sign in the key pad, type 0.22, press the comma or , sign, then
move the cursor to C8, left click the mouse and hold from C8 to L8 to highlight the
gross benefit values. Release the mouse and then press the close parenthesis or )
sign in the key pad. Press enter in the key pad.
e. Compute the sum of the discounted gross costs. Use the NPV formula above, but
instead of highlighting the net benefits figures, highlight the stream of gross costs.
Move the cursor to C18 (i.e., column C, row 18), type = NPV, press the open
parenthesis or ( sign in the key pad, type 0.22, press the comma or , sign, then
move the cursor to C13, left click the mouse and hold from C13 to L13 to highlight
the gross cost values. Release the mouse and then press the close parenthesis or
) sign in the key pad. Press enter in the key pad.
f. Divide the sum of the discounted gross benefits estimated in step a by the sum of the
discounted gross costs in step b.
Move the cursor to C19 (i.e., column C, row 19), press the = sign in the key pad, move
the cursor to C17, press the / sign in the key pad, move the cursor to C18, and press
enter in the key pad.
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Hence, BCR = 1.45. This means that for every PhP1 of gross cost incurred, P1.45 of
gross benefits are generated based on present values. Since BCR is greater than 1.0,
the project is financially viable based on this investment criterion.
6. Conduct sensitivity analysis. Using the data presented in the financial cash flow table
(Appendix Table G.9), sensitivity analysis of the ubi powder processing enterprise will
be illustrated using two scenarios: a) a 10% decrease in ubi powder sales; and b) a
10% increase in gross costs.
h. Copy Appendix Table G.9 by highlighting the entire table (i.e., starting from A3, drag
the mouse down to A23, and then to the right until the last cell, L23). Then, press the
copy menu in the tool bar. Move the cursor below this table to A28 and then press the
paste menu in the tool bar.
i. Change the title number and title to: Appendix Table G.10. Sensitivity analysis of the
ubi powder processing enterprise, Laguna: Scenario 1: 10% decrease in ubi powder
sales.
j. Delete the copied ubi powder sales figures in the new table (i.e., Appendix Table G.10)
under the Financial & Sensit Analyses worksheet starting from C31 to L31.
k. Move the cursor to C31 in Appendix Table G.10, then press the = sign in the key pad,
move the cursor to C6 in Appendix Table G.9, then press the * sign in the key pad, type
0.90. Then press enter in the key pad. If there is a decrease in the original ubi powder
sales value (v), use the following formula to compute the new value (v*): = v *(1 - r)
where r is the percentage rate of decrease. To multiply using the Excel program, use
*. Hence, the new value in C31 (i.e., 10% lower value) is computed as: =C6*(1 - .10)
or =C6*.90.
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l. To change the ubi sales values in other cells, move the cursor to C31, click the copy
menu in the tool bar, move the cursor to D31 and drag to the right up to the last entry,
L31, and then click the paste menu in the tool bar.
m. Do not change the copied figures under fixed capital investment, processing costs, and
selling and administrative costs in Appendix Table G.10.
n. With the change in ubi powder sales values, new values of gross benefits, gross costs,
net benefits, NPV, IRR and BCR will be automatically computed since these are all
expressed in formulas. The new NPV figure is PhP 4,640,759.54 The new IRR figure
is 54.5%, and the new BCR is 1.31. Hence, the project will still be financially viable if
there will be a 10% decrease in ubi powder sales.
h. Copy Appendix Table G.9 by highlighting the entire table (i.e., starting from A3, drag
the mouse down to A23, and then to the right until the last cell, L23). Then, press the
copy menu in the tool bar. Move the cursor below this table to A54 and then press the
paste menu in the tool bar.
i. Change the title number and title to: Appendix Table G.11. Sensitivity analysis of the
ubi powder processing enterprise, Laguna: Scenario 2: 10% increase in gross costs.
j. Delete the figures under fixed capital investment, processing costs, and selling and
administrative costs in the new table (i.e., Appendix Table G.11) starting from C61 to
L61; from C62 to L62; and from C63 to L63.
k. Move the cursor to C61 in Appendix Table G.11, then press the = sign in the key pad,
move the cursor to C10 in Appendix Table G.9, then press the * sign in the key pad,
type 1.10. Then press enter in the key pad. For example, if there is an increase in the
original fixed capital investment figure (v), use the following formula to compute the
new value (v**): = v *(1 + r) where r is the percentage rate of increase. To multiply using
the Excel program, use *. Hence, the new fixed capital investment value in C61 (i.e.,
10% higher value) is computed as: = C10*(1 + .10) or = C10*1.10. To determine the
new fixed capital investment value in H61 in Appendix Table G.11, press the = sign in
the key pad, move the cursor to H10 in Table Appendix Table G.9, then press the *
sign in the key pad, type 1.10. Then press enter in the key pad.
l. To determine the new processing cost figure in D62 in Appendix Table G.11, press the
= sign in the key pad, move the cursor to D11 in Appendix Table G.9, then press the *
sign in the key pad, type 1.10. Then press enter in the key pad. To change the
processing cost figures in other cells, move the cursor to D62, press the copy menu in
the tool bar, move the cursor to E62 and drag to the right up to the last entry, L62, and
then click the paste menu in the tool bar.
m. To determine the new selling and administrative cost figure in D63 in Appendix Table
G.11, press the = sign in the key pad, move the cursor to D12 in Appendix Table G.9,
then press the * sign in the key pad, type 1.10. Then press enter in the key pad. To
change the selling and administrative cost figures in other cells, move the cursor to
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D63, press the copy menu in the tool bar, move the cursor to E63 and drag to the right
up to the last entry, L63, and then click the paste menu in the tool bar.
n. Do not change the copied ubi powder sales and gross benefits figures in Appendix
Table G.11.
o. With the change in the values under fixed capital investment, processing costs, and
selling and administrative costs in Appendix Table G.11, new values of gross benefits,
gross costs, net benefits, NPV, IRR, and BCR will be automatically computed since
these are all expressed in formulas. The new NPV figure is PhP 5,286,420.26, the new
IRR figure is 55.66%, and the new BCR is 1.32. Hence, the project will still be financially
viable based on the NPV, IRR, and BCR criteria. It can be noted that the project is less
sensitive to a 10% increase in gross costs as compared to the same percentage
decrease in ubi powder sales as evident from higher NPV, IRR, and BCR estimates in
the former sensitivity assumption as compared to the latter sensitivity assumption.
7. Conduct graphical analysis to show the sensitivity of FIRR to different risk situations
This section presents the steps in creating a column chart (i.e., "Clustered Column") to
show the sensitivity of FIRR of the ubi powder processing enterprise to different risk
situations. To create the column chart, IRR estimates derived from Appendix Tables
G.9, G.10, and G.11 were used.
h. Copy the data shown above in the Graph worksheet, Highlight the cells under column
A (assumptions) and column B (IRR (%). Place the cursor in A2 (column A, row 2),
drag the mouse to the right up to B2, and down to B5.
i. Choose and press Insert in the tool bar, choose a chart type by pressing Column, then
under 2-D Column, choose and press Clustered Column sub-type.
j. If you want to show the IRR figures in the graph, press layout in the chart tool bar, then
choose and click data label from the options, and finally click outside end option.
k. To insert the vertical axis title in the graph, select and click axis title. Under axis title,
choose and click vertical axis title. Among the options, choose and click horizontal title
and then type IRR (%) inside the vertical axis title box.
l. To insert the horizontal axis title in the graph, select and click axis title in the chart tool
bar. Choose and click horizontal axis title. Among the options, choose and click title
below the axis. Then type assumptions inside the horizontal axis title box.
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m. Under "chart tool options", click chart title", then click above chart. Type the figure title
in the chart title box (e.g., Figure 1. Results of the sensitivity analysis showing the
changes in IRR under the base assumptions and risk scenarios, ubi powder processing
enterprise, Laguna, 2008). However, in the chart example below, the chart or figure
title is shown below the graph.
80.00
68.79
70.00
60.00 54.36 55.66
50.00
IRR (%) 40.00
30.00
20.00
10.00
0.00
Base Assumptions 10% Decrease in Ubi 10% Increase in Gross
Powder Sales Costs
Assumptions
Figure 1. Results of sensitivity analysis showing the changes in IRR under the base
assumptions and risk scenarios, ubi powder enterprise, Laguna, 2008.
Interpretation:
Under the base assumptions, the ubi powder enterprise is financially viable since the
estimated IRR (68.79%) is greater than the opportunity cost of capital (22%/year). To
determine the effects of risk factors on the financial viability of the project, sensitivity
analysis was conducted using two scenarios: 1) a 10% decrease in ubi powder sales;
and 2) a 10% increase in gross costs. Results of the sensitivity analysis showed that
the project is more sensitive to a decrease in ubi powder sales than to an increase in
gross costs. The estimated IRR decreased to 54.36% if ubi powder sales will decrease
by 10%. On the other hand, if gross costs will increase by 10%, IRR will decrease to
55.66%, but the IRR is higher than that when there is a decrease in ubi powder sales
by the same percentage.
In the Financial and Sensit Analysis worksheet, move the cursor to C81, press the =
sign in key pad, move the cursor to C15 in Appendix Table G.9 to copy the NPV under
base assumptions (i.e., NPVb), then press enter in the key pad. Move the cursor to
C82, press the = sign in key pad, move the cursor to C40 in Appendix Table G.10 to
copy the NPV under case 1 (i.e., NPV1), then press enter in the key pad. Compute the
difference between NPVb and NPV1 by moving the cursor to E81, pressing the = sign,
moving the cursor to C81, pressing the sign in the key pad, moving the cursor to C82,
and then pressing enter in the key pad.
Let Vb = 1.0 (meaning 100% original ubi powder sales values under the base situation);
under cell C83
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V1 = 0.9 (meaning 90% of the original values of ubi powder sales after the 10%
decrease in ubi powder sales); under C84
Compute the difference between Vb and V1 by moving the cursor to E83, pressing the
= sign, moving the cursor to C83, pressing the sign in the key pad, moving the cursor
to C84, and then pressing enter in the key pad.
Compute the switching value for a change in ubi powder sales by moving the cursor to
C85, pressing the = sign in the key pad, typing 100, pressing open parenthesis or (
sign in the key pad, moving the cursor to C81, pressing the / sign in the keypad, moving
the cursor to E81, pressing the close parenthesis sign in the key pad, pressing the *
sign in the keypad, pressing open parenthesis or ( sign in the key pad, moving the
cursor to E83, pressing the / sign in the keypad, moving the cursor to C83, pressing
the close parenthesis sign in the key pad, and then pressing enter in the key pad.
The estimated switching value is 31.14%. This means that NPV will become zero (or
IRR will be equal to the opportunity cost of capital or the discount rate of 22%, or the
BCR = 1) if ubi powder sales will decrease by 31.14%. A decrease in ubi powder sales
by more than 31.14% will result in a negative NPV and will make the proposed ubi
powder investment project unprofitable.
In the Financial and Sensit Analysis worksheet, move the cursor to C89, press the =
sign in key pad, move the cursor to C15 in Appendix Table G.9 to copy the NPV under
base assumptions (i.e., NPVb), then press enter in the key pad. Move the cursor to
C90, press the = sign in key pad, move the cursor to C66 in Appendix Table G.11 to
copy the NPV under case 2 (i.e., NPV2), then press enter in the key pad. Compute the
difference between NPVb and NPV2 by moving the cursor to E89, pressing the = sign,
moving the cursor to C89, pressing the sign in the key pad, moving the cursor to C90,
and then pressing enter in the key pad.
Let Vb = 1.0 (meaning 100% original gross cost figures under the base situation); under
cell C91
V2 = 1.1 (meaning 110% of the original gross cost figures after the 10% increase in
gross costs); under C92
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Compute the difference between Vb and V2 by moving the cursor to E90, pressing the
= sign, moving the cursor to C91, pressing the sign in the key pad, moving the cursor
to C92 (disregard the negative sign of this cell), and then pressing enter in the key pad
Compute the switching value for a change in gross costs by moving the cursor to C93,
pressing the = sign in the key pad, typing 100, pressing open parenthesis or ( sign in
the key pad, moving the cursor to C89, pressing the / sign in the keypad, moving the
cursor to E89, pressing the close parenthesis or ) sign in the key pad, pressing the *
sign in the keypad, pressing open parenthesis or ( sign in the key pad, moving the
cursor to E91, pressing the / sign in the keypad, moving the cursor to C91, pressing
the close parenthesis or ) sign in the key pad, and then pressing enter in the key pad.
The estimated switching value is 44.84%. This means that NPV will become zero (or
IRR will be equal to the opportunity cost of capital or the discount rate of 22%, or the
BCR = 1) if gross costs will increase by 44.84%. An increase in gross costs by more
than 44.84% will result in a negative NPV and will make the proposed ubi powder
investment project unprofitable.
9.0 Compute the undiscounted measures of project worth (i.e., payback period and the
return on investment (ROI)
Under the Financial & Sensit Analyses worksheet, move the cursor to D159 (i.e., column
D, row 159), press the = sign in the key pad, move the cursor to D6 in Appendix Table
G.9, press the (minus) sign in the key pad, move the cursor to G10 under the Raw
and Packaging Material Costs worksheet, press the sign (minus) sign in the key
pad, move the cursor to H6 under the Labor Costs worksheet, press the sign
(minus) sign in the key pad, move the cursor to H12 under the Labor Costs worksheet,
press the sign (minus) sign in the key pad, move the cursor to H5 under the Other
Operating and Admin Costs worksheet, press the sign (minus) sign in the key pad,
move the cursor to H6 under Other Operating and Admin Costs worksheet, press the
sign (minus) sign in the key pad, move the cursor to H7 under Other Operating and
Admin Costs worksheet , press the sign (minus) sign in the key pad, move the
cursor to H11 under Other Operating and Admin Costs worksheet , press the sign
(minus) sign in the key pad, move the cursor to H12 under Other Operating and Admin
Costs worksheet, and then press enter in the key pad. To compute annual gross margin
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in years 3 to 10, move the cursor to D159, press the copy menu in the tool bar, move
and drag the tool bar to the right from E159 to L159, and then press the paste menu in
the tool bar.
b. Positive gross margin is realized starting in year 2. Compute the difference between the
initial fixed capital investment and the gross margin in year 2 to determine the additional
gross margin that should be received in year 3 to recover the initial capital investment.
Move the cursor to E163, press the = sign in the key pad, move the cursor to C10,
press the sign, move the cursor to D159, and then press enter in the key pad. The
difference is PhP 768,952.80. This means that about PhP 768,952.80 of additional
gross margins in years 3 would be needed to recover the initial capital investment.
c. Compute the monthly gross margin in year 3 by dividing the gross margin in year 3 by
8 months of operation. Move the cursor to E165, press the = sign in the key pad, move
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the cursor to E159, press the / sign in the key pad, type 8, and press enter in the key
pad. The gross margin per month in year 3 is PhP 532,868.40.
d. Determine the number of months in year 3 to meet the additional gross margin to recover
the initial capital investment by dividing the difference (i.e., PhP 768,952.80 by the
estimated gross margin per month (i.e., PhP 532,868.40) in year 3. Move the cursor to
E166, press the = sign, move the cursor to E163, press the / sign, move the cursor to
E165, press enter in the key pad.
a. Compute the average annual ubi powder sales/income. Move the cursor to C146,
press the = sign, type average, press the open parenthesis or ( sign in the key pad,
move the cursor to D6, move or drag the cursor to the right to E6 up to L6, press
the close parenthesis or ) sign in the key pad, and then press enter in the key pad.
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b. Compute the average annual processing costs. Move the cursor to C147, press the
= sign, type average, press the open parenthesis or ( sign in the key pad, move the
cursor to D11, move or drag the cursor to the right to E11 up to L11, press the close
parenthesis or ) sign in the key pad, and then press enter in the key pad.
c. Compute the average annual selling & administrative costs. Move the cursor to C148,
press the = sign, type average, press the open parenthesis or ( sign in the key pad,
move the cursor to D12, move or drag the cursor to the right to E12 up to L12, press
the close parenthesis or ) sign in the key pad, and then press enter in the key pad.
d. Copy the depreciation figure under the Fixed Capital Investment worksheet. Move the
cursor to C149, press the = sign in the key pad, move the cursor to G42 (column G,
row 42) under the Fixed Capital Investment worksheet, and then press enter in the key
pad.
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e. Compute annual net income using the following formula:
Annual net income = Ave. annual ubi powder sales Ave. annual processing costs Ave.
annual selling & administrative costs Depreciation
Move the cursor to C150, press the = sign in the key pad, move the cursor to C146,
press the sign in the key pad, move the cursor to C147, press the minus or sign in
the key pad, move the cursor to C148, press the sign in the key pad, move the
cursor to C149, press enter in the key pad.
e. Copy the initial fixed capital investment in Appendix Table G.9. Move the cursor to
C151, press the = sign in the key pad, move the cursor to C10, and then press enter
in the key pad.
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= (3,077,850.20/5,031,900.00) x 100 = 61.03%
Move the cursor to C152, press the = sign in the key pad, move the cursor to C150,
press the / sign in the key pad, move the cursor to C151, press the * sign in the key
pad, type 100, and then press enter in the key pad.
The project is financially viable based on the ROI criterion because the estimated
ROI of 61.03% is higher than 50%.
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