siem reap proceedings editmm jan203.64.245.61/fulltext_pdf/eb/2001-2010/eb0127.pdf · chili in lao...

Proceedings

Antonio L. Acedo Jr.Katinka Weinberger

Editors

19-21 August 2008Siem Reap, Cambodia

Economic Practices of Postharvest Technologies for Vegetables

Economic Analysis of Postharvest Technologies for Vegetables

AVRDC - The World Vegetable Center Shanhua, Taiwan

Economic Analysis of Postharvest Technologies for Vegetables

Proceedings of the Greater Mekong Subregion Workshop 19-21 August 2008 Siem Reap, Cambodia

Antonio L. Acedo Jr. Katinka Weinberger

Editors

AVRDC – The World Vegetable Center AVRDC - The World Vegetable Center is the leading international nonprofit organization committed to alleviating poverty and malnutrition in the developing world through the increased production and consumption of safe vegetables. AVRDC – The World Vegetable Center P.O. Box 42 Shanhua, Tainan 74199 TAIWAN Tel: +886 6 583 7801 Fax: +886 6 583 0009 Email: [email protected] Web: www.avrdc.org AVRDC Publication: 09-730 ISBN 92-9058-177-8

Editor: Maureen Mecozzi

AVRDC Publication Team: Kathy Chen, Chen Ming-che, Vanna Liu, Shiu-luan Lu

© 2009 AVRDC – The World Vegetable Center

Citation Acedo AL Jr., Weinberger K. (eds.) 2009. Proceedings of the GMS workshop on economic analysis of postharvest technologies for vegetables, 19-21 August 2008, Siem Reap, Cambodia. AVRDC Publication No. 09–730. AVRDC – The World Vegetable Center, Taiwan. 117 p.

Organizers AVRDC – The World Vegetable Center, ADB Postharvest Project Office Vientiane, Lao PDR Cambodia Department of Agronomy and Agricultural Land Improvement

Financial support Asian Development Bank, through RETA 6376

Workshop participants

L-R: Mr. Chansamone Phomachan, Lao PDR; Mr. Borarin Buntong, Cambodia; Mr. Thongsavath Chanthasombath, Lao PDR; Dr. Weerachet Jittanit, Thailand; Dr. Tanachote Boonvorachote, Thailand (resource person; Ms. Sambath Sonnthida, Cambodia; Ms. Srey Sinath, Cambodia; Ms. Hoang Thi Le Hang, Vietnam; Dr. Cho Cho Myint, Myanmar; Ms. Tim Savann, Cambodia; Ms. Nguyen Thi Thuy Linh, Vietnam; Dr. Kyaw Nyein Aye, Myanmar; Dr. Panida Boonyaritthongchai, Thailand; Dr. Chen ZongQi, China; Dr. Li Hong, China; Dr. Antonio Abamo, Philippines; Mr. Mong Vanndy, Cambodia; Dr. Antonio Acedo Jr., AVRDC-Lao PDR Office; Mr. Christian Genova II, AVRDC-HQ, Taiwan

Contents Acknowledgements iii

Foreword iv

Basic Concepts

Economic Analysis of Technologies: Importance and Basic Concepts Antonio Abamo

1

Measuring the Financial Viability of Fresh Vegetable Handling Technologies Antonio Abamo

7

Analysis of Economic Viability of Processing Agricultural Products Tanachote Boonvorachote

30

Financial Analysis of Projects: The Solar Dryer Christian Genova II

45

Workshop Presentations

Economic Analysis of Selected Postharvest Technologies for Tomato and Cabbage in Cambodia Borarin Buntong, Mong Vanndy, Antonio Acedo Jr.

72

Economic Analysis of Precooling and Cold Storage of Chinese Kale in Cambodia Sombath Sunthida, Srey Sinath, Tim Savann

69

Economic Analysis of Vacuum Cooling of Iceberg Lettuce in Yunnan, China Li Hong, Chen ZongQi

73

Economic Analysis of Selected Postharvest Technologies for Tomato and Chili in Lao PDR Thongsavath Chanthasombath, Chansamone Phomachan, Antonio Acedo Jr.

75

Economic Analysis of Chitosan Treatment of Lettuce in Myanmar Kyaw Nyein Aye

83

Economic Analysis of Melon Cold Storage and Onion Drying in Myanmar Cho Cho Myint

85

Economic Analysis of Tunnel Drying of Shiitake Mushroom and Chili in Thailand Weerachet Jittanit

90

Economic Analysis of Hydrocooling and Modified Atmosphere Packaging of Chinese Kale in Thailand Panida Boonyaritthongchai

98

Economic Analysis of Selected Postharvest Technologies for Tomato, Chili and Chinese Mustard in Vietnam Nguyen Thi Thuy Linh, Hoang Le Hang, Chu Doan Thanh, Antonio Acedo Jr.

102

Annex

Program 111

Participants 114

Acknowledgements AVRDC – The World Vegetable Center and workshop participants gratefully acknowledge financial support from the Asian Development Bank through the RETA 6376 project. The organizers also thank the people who assisted in the workshop preparations and who facilitated and accommodated the group during the study tour.

iii

Foreword AVRDC – The World Vegetable Center’s ADB Postharvest Program in the Greater Mekong Subregion or GMS (Cambodia, China-Yunnan, Lao PDR, Myanmar, Thailand, and Vietnam) includes technology generation and dissemination among its primary missions. Technology generation strives to go beyond identifying the optimum conditions that produce maximum technical benefits by transforming the technical advantage and resources/risks involved into economic terms. Appreciation of the economic as well as technical benefits of a technology can stimulate dissemination efforts and increase adoption by the target clientele. Economic analysis of technologies usually requires the determination of profitability, resource requirements, and risk. Resource assessment is especially important for resource-poor farmers, processors, and other entrepreneurs. There are different methods of measuring the economic viability of technologies, such as cost and return analysis, partial budget analysis, net present value analysis, and enterprise budget analysis. Researchers and others with a limited background in economics can use these simple analyses to evaluate technologies in numerical, comparable terms. The workshop aims to build capacity in the economic analysis of postharvest technologies developed by the program. The specific objectives are to share knowledge and expertise in measuring the economic viability of technologies, particularly as applied to fresh produce handling and processing in GMS countries; to provide methods that can be used by non-economists to analyze the economic viability of selected technologies; and to foster regional cooperation in GMS in vegetable postharvest technology R&D programs. The workshop gathered key project players, GMS partners, economic experts and other R&D workers to share knowledge and learn new skills. Invited experts gave lectures on specific topics; after each lecture, participants engaged in hands-on exercises, conducting economic analyses of selected technologies in each GMS country and then presenting and discussing their results. This proceeding contains the lectures and country presentations of economic analysis of selected postharvest technologies. It is a valuable reference for researchers, technology developers, trainers, and other stakeholders, including academicians and policy makers, who want to evaluate the economics of a potential or developed technology. Dr. Antonio L. Acedo Jr. Dr. Katinka Weinberger

AVRDC – The World Vegetable Center

iv

Basic Concepts

Economic Analysis of Technologies: Importance and Basic Concepts

Antonio P. Abamo

Department of Agribusiness Management, College of Engineering and Agri-Industries, Visayas State University, Baybay, Leyte, Philippines

Introduction “We must study the present in the light of the past for the purpose of the future.”

-- John Maynard Keynes (1883-1946) Economic assessment of technologies consists essentially of measuring how adequate and how efficient an existing technology has been in achieving the objectives of the enterprise over some past operating phase (e.g. cropping season, storage period, processing cycle). Because most enterprise activities are motivated by net income, we can assume that the objective will be to maximize net income, directly for market-oriented enterprises or indirectly by imputation of value for subsistence enterprises. To maximize net income, the farmer or entrepreneur needs to employ the appropriate production technology. Farmers can use modern technology, traditional technology, or improved technology (a combination of modern and traditional) so long as it will result in a higher net return vis-à-vis available resources and the associated costs involved. There are three important elements in the economic analysis of technologies: (1) profitability, (2) cost, and (3) risk. If a farmer is familiar with the technical and biophysical requirements of a technology, the first two are easily determined. However, the third element—risk—is difficult to estimate, much less make any objective comparison of due to the various uncertainties involved. There are advanced methods that do incorporate risk determination in the economic analysis. This paper delves into some basic concepts of costs, revenue and profit, and investment/capital that are essential to assess the economic viability of agricultural technologies, and introduces some basic tools for risk analysis.

Production Costs Production costs are the value of inputs used in the production process (e.g. from harvesting and packhouse operations to arrival in market; from product preparation to production of processed product such as chili-tomato sauce). In basic economics, there are various factors or inputs to production: land, labor, capital, and entrepreneurship. The total production cost is the sum of all the values of all inputs/factors used in production activities. Because production

Economic Analysis of Postharvest Technologies for Vegetables 1

costs included in any accounting period should only be those that are actually incurred or used in producing the output generated in that period, each input/factor contributes costs of a different nature and extent in the production process. In the case of land, for example, the relative economic value in the use of a piece of land becomes part of the entire spectrum of production cost. The economic value is normally captured by the land rent per unit area, which is a commonly agreed standard of payment for the use of land in a particular geographic area. The wage rate captures the appropriate value per unit use of labor in a particular production activity. The use of capital in the production process applies in two ways; one is for intermediate inputs such as sanitizers for washing, packaging materials, processing ingredients, etc., which are normally used up every process cycle. The other application of capital is for essential items whose useful life will last for more than one process cycle, e.g. cold rooms and other storage facilities, packhouse tools, processing equipment, buildings, etc.

Fixed and variable costs Production costs usually are divided into fixed and variable costs. Cost items that do not vary with production levels (i.e. remain the same regardless of the output produced) are known as fixed costs. Examples are land rental, salaries of regular workers, depreciation, etc. Cost items that vary with the level of output produced are known as variable costs. Examples are labor costs for on-call workers, cost of packaging materials, processing ingredients, chemicals, and water and other utility costs.

Cash and non-cash costs Production costs may be cash or non-cash. The total value of inputs requiring outright or actual “out of pocket” costs (paid in cash) are known as cash costs of production. Examples are cash payment in buying containers, workers’ wages, etc. Non-cash costs are cost items that do not need an actual “out of pocket” payment within the entire production cycle. Examples are harvester/threshers’ share, exchange labor, labor paid partially in kind, etc. For smallholder or resource-poor farming enterprises, the non-cash component of production cost is very important. There are three non-cash cost items that are often overlooked in economic viability analyses: (1) interest on capital/investment, (2) depreciation, and (3) cost of family labor. Failure to account for these cost items would understate the economic viability assessment and render it unreliable.

Interest on investment (Opportunity cost of capital) Money, when invested, can be put into various alternative income-generating options. If it is deposited in the bank, the interest or income would be the amount of deposit multiplied by the interest rate offered by the bank. When it is used in a

2 Workshop Proceedings, 19-21 August 2008

postharvest enterprise, the potential interest or income is lost, which is equal to the amount of money that could have been earned if it was deposited in the bank. This lost or foregone income generally is referred to as the interest on investment or opportunity cost of capital. It can be applied either to variable or fixed costs. When the money is used to buy variable inputs (e.g. packaging materials, processing ingredients, etc.), interest on investment is a variable cost; it becomes a fixed cost if the money is used to buy fixed inputs such as tools, equipment/machineries, buildings, etc. The computational procedure for a variable interest on investment is done by multiplying the amount of money spent on operating expenses by the prevailing interest rate of money in the bank. A little twist of the computational formula is done if the interest on investment is a fixed cost. It is given as follows:

I =

2

SVOC * r

Where:

I = fixed interest on investment r = prevailing interest rate in the bank OC = Original cost (book value) of fixed item under consideration SV = Salvage value or scrap value, the value of the item at the end of its useful life

Depreciation cost Technically, depreciation cost represents the cost of wear and tear on a fixed item/asset (tools, equipment, machinery, building, etc.). Depreciation captures the decrease in value of the fixed asset as it is being used to generate income in the operation. If the asset will last for more than one storage cycle or more than one accounting year, it is not correct to deduct the entire value of an asset in one cycle/year, as it will understate the income in that period. Because the item/asset will be used for many years or process cycles, it is appropriate to spread the original cost over the entire life span of the item/asset. There are three ways to compute depreciation cost: 1. Straight-line method (SL): This is applicable for an item that depreciates at a more or less similar rate each year over its useful life. The computational formula is:

AD =LS

SVC


Where: AD = Annual depreciation C = Acquisition cost (purchase price) SV = Salvage value LS = Life span (estimated number of years)

An alternative formula for the SL method is:

AD = (C – SV) * R Where:

R = percent depreciation per annum computed as 100% divided by the estimated lifespan of the item

2. Double–declining-balance method (DDB): This is more appropriate for items that depreciate considerably during the first few years, with depreciation declining in the later period of the useful life. This is also known as the accelerated depreciation method. The computational formula is:

AD = (Acquisition Cost) * R

Where: AD = Annual depreciation C = Acquisition cost (purchase price) R = two times the R in the SL method LS = Life span (estimated number of years)

3. Sum-of-the-years’ digits method (SOYD): This is another type of accelerated depreciation method applicable for asset/items like equipment, machinery, buildings etc. that tend to depreciate during the first few years. The computational formula is:

AD = (C – SV) *SOYD

RL

Where:

RL = Remaining lifespan of the item

SOYD = Sum of the useful life in years. Example: if the useful life is 10 years, add the numbers from 1 up 10, which is equal to 55 (1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10) Among the above three methods, the SL method is commonly used to account for depreciation charges for most farm business operations. It should be noted that regardless of the method used, the total amount of depreciation would still be the same; it is the pattern of annual depreciation charges that varies. Moreover, the choice of the method for computing depreciation solely depends on the owner of the enterprise.


Cost of family labor Cost of family labor is the opportunity cost of household labor. This means that if we value the cost of family labor, we simply add the total number of labor man-days (MD) spent by the family member in the farm multiplied by the daily wage rate that a family member could have earned if he/she works in other enterprise. The wage rate used in the computation must be the standard daily wage in the area. For cost and return analysis purposes, cost of family labor is normally not deducted from the gross income to arrive at the net income, which then represents returns to family labor.

Income and Profitability Measures Income can also be cash or non-cash. Cash income is a straightforward matter because it includes the money income originating from the sale of the output produced. Non-cash income is the value of the output accruing to the producer involving no actual cash payment. Examples are vegetables produced or processed into products that are consumed by the household, given away, or paid in kind. Net income is the general measure of value addition from all the production activities of an enterprise. It is obtained after deducting all relevant production costs from the gross income. Gross income is the value of the total output produced over some accounting period (usually a year), whether or not that output is sold (Brown and Librero, 1991). Depending on the type of enterprise under consideration, the following are common definitions of gross income: Crops (e.g. vegetables) – gross income is the sum of all output from

each crop multiplied by price.

Processed products (e.g. chili-tomato sauce, tomato paste, fermented Chinese mustard) – gross income is the sum of the outputs (number of bottles with specific weight) multiplied by the unit price.

Another essential component in the measurement of production income is the price used in determining the value of the output. The rule of thumb is to use the effective price received by farmer. This is referred to as the farm gate price. In cases where the farmer markets his own produce and hence receives the prevailing market price, the effective price is obtained by deducting the transportation cost from the gross income. In the case of valuing non-cash income such as product consumed by the household, the opportunity value of the product is used, which is the monetary value the farmer acquires per unit product from other sources.


Lastly, profitability of an enterprise has both a current and future time dimension. Whatever measure used in determining profit depends on (1) length of the production cycle of the enterprise, and (2) scale of investment involved in the operation. For production activities with smaller investment and a short production cycle, the undiscounted measure of profitability is used; for capital-intensive production activities with a longer process cycle or less capital-intensive activities with longer cropping cycles, the discounted measure of profitability is used. This will be elaborated in the next topic. Undiscounted measures of profitability: Net cash income Gross margin or income above variable costs Net income (return to owner’s labor and management) Return on investment (ROI), computed by the formula:

ROI =TI

OCLMAI * 100

Where:

AI = Adjusted net income (net income added with interest on borrowed capital)

OCLM = Opportunity cost of labor and management TI = Total investment The Decision Rule for ROI is that it should be > market rate of interest on capital. Discounted measures of profitability: NPV (Net present value) IRR (Internal rate of return) BCR (Benefit-cost ratio)

References Aragon, C.A. 1991. Cost and return analysis. In: Economic and Social Science Research

Methodologies in Agriculture. PCARRD. Book Series No. 113. Brown, E.O. and Librero, A.R. 1991. Measuring the economic viability of agricultural

technologies. PCARRD Book Series No. 118. Brown, E.O., Daite, R.B. and Cardenas, D.C. 2006. Ex-ante economic evaluation protocol

for evaluating R&D project worth: A simplified approach. PCARRD Information Bulletin No. 251.

Gittinger, J.P. 1991. Economic analysis of agricultural projects. 2nd edition. Washington DC: Economic Development Institute of the World Bank.

Jamandre, W.E. 2007. Conducting financial analysis of a proposed project. Paper presented in the training on HBME. CLSU, Munoz, Nueva Ecija, Philippines.


Measuring the Financial Viability of Fresh Vegetable Handling Technologies

Antonio P. Abamo

Department of Agribusiness Management, College of Engineering and Agri-Industries, Visayas State University, Baybay, Leyte, Philippines

Introduction A technology impacts on an enterprise by increasing production output, reducing cost of operation (production input), or both. Its effect could be determined by comparing the performance of an enterprise with and without the technology. Assessing profitability can be done ex-ante or ex-post. Ex-ante analysis is the estimation of the potential profit if the technology would be adopted. The analysis uses established empirical (secondary) data on technical coefficients/specifications on input requirements per unit output, while input costs and output value are based on prevailing market prices at the time the analysis was undertaken. Some of the methodologies that are intrinsically ex-ante are enterprise budget analysis, partial budget analysis, cost-benefit analysis (CBA) or benefit-cost analysis (BCA), policy analysis matrix, etc. Ex-post analysis is the determination of the actual profit derived from a production activity or process after the technology has been adopted. It uses actual cost and return data of production activities employing the technology. The intention of ex-ante assessment is to determine how much net income can be derived if the technology would be employed, while in ex-post assessment, it tells how much net income or profit was obtained from employing the technology. Cost and return analysis (CRA) is a typical example of an ex-post assessment.

Choice of Methodology There are different methodologies for measuring the economic viability of a technology. Selection of an appropriate methodology depends on several factors, such as production period, magnitude of investment, and capital requirement. For cold storage of vegetables, which requires significant capital investment, or for processed products that may take a long time to dispose, the net present value (NPV) approach of an ex-ante analysis is applicable. This is essentially employing a CBA framework of a typical projected cash flow statement for the business. For postharvest operations with relatively minimal capital requirement, return on investment (ROI) and other undiscounted measures of profitability can


be useful. The ROI can be computed directly from the CRA. For a package of technology (POT) where one technology is compared with another, an ex-ante enterprise budget analysis can be used. If a component technology is being assessed, partial budget analysis would be more appropriate. There are really no hard and fast rules in terms of which methodology or procedure is best for assessing the economic viability of a certain technology. The ultimate choice of methodology depends on the person doing the profitability analysis. For instance, it is possible to assess a technology using an enterprise budget or a partial budget. Knowing that the two would have the same result, why then go through the hassle of constructing an enterprise budget when a partial budget can answer the economic questions just as well?

Cost and Return Analysis CRA is an ex-post profitability assessment type involving detailed accounting of cost and return of items during the entire cycle. The steps are as follows: 1. Set up the cost and return table (Table 1). Table 1. Sample cost and return table ITEM UNIT QUANTITY UNIT PRICE VALUE Income Cash Income Non-cash Income Total Income Costs Variable Cash Costs Labor Inputs Material Inputs Transportation Miscellaneous expenses Total Variable Costs Fixed Cash Cost Fixed Non-cash Cost Depreciation Total Fixed Costs Total Costs Net Income Gross Margin


2. Determine the items for income and expense headings and separate them according to the account they belong (Table 2). Table 2. Sample cost and return table with income and cost items classified by account ITEM UNIT QUANTITY UNIT PRICE VALUE Income Cash Income kg 12, 000 20 Non-cash Income Total Income Costs Variable Cash Costs Labor Inputs Loading/unloading MD 10 Washing MD 10 Sorting MD 20 Air-drying MD 10 Treatment MD 15 Packing MD 10 Hauling MD 20 Storing MD 10 Inspection MD 10 Re-sorting MD 20 Disposal of culls MD 10 Misting MD 20 Fumigating MD 30 Re-sorting MD 30 Miscellaneous MD 20 Material Inputs Sanitizers 20 g 10 100 Pallets pc 10 Brushes pc 10 Fumigant kg 10 Carton boxes kg 20 Waxes Plastic trays Plastic buckets pc 5 Applicators Transportation Miscellaneous expenses Total Variable Costs Fixed Cash Cost Permanent laborers Land rent Fixed Non-cash Cost Depreciation Total Fixed Costs Total Costs Net Income Gross Margin

MD: man-day


3. Compute for indicators of income such as net income and gross margin (Table 3). Table 3. Cost and return analysis of cold storage of 12 tons of tomatoes (1 USD=40 PHP)

ITEM UNIT QUANTITY

UNIT PRICE

VALUE (P) TOTAL (P)

Income Cash Income Kg 12, 000 20 240 000.00 Non-cash Income nil Total Income 240 000.00 Costs Variable Cash Costs Labor Inputs

Loading/unloading MD 10 4 400.00 Washing MD 10 4 400.00 Sorting MD 20 8 800.00 Air-drying MD 10 2 200.00 Treatment MD 15 3 300.00 Packing MD 10 2 200.00 Hauling MD 20 4 400.00 Storing MD 10 2 200.00 Inspection MD 10 2 200.00 Re-sorting MD 20 4 400.00 Disposal of culls MD 10 2 200.00 Misting MD 20 4 400.00 Fumigating MD 30 6 600.00 Re-sorting MD 30 6 600.00 Miscellaneous MD 20 4 400.00 62 700.00

Material Inputs Sanitizers 20 g 10 100 1 000.00 Pallets pc 10 10 000.00 Brushes pc 10 5 000.00 Fumigant kg 10 5 000.00 Carton boxes kg 20 24 000.00 Waxes 1 000.00 Plastic trays 1 000.00 Plastic buckets pc 5 1 000.00 Applicators 500.00 48 500.00

Transportation 10 000.00 Miscellaneous expenses 4 850.00 Total Variable Costs 126 050.00 Fixed Cash Cost Permanent laborers 18 000.00 Land rent 12 000.00 30 000.00 Fixed Non-cash Cost Depreciation 11 785.83 11 785.83 Total Fixed Costs 41 785.83 Total Costs 167 835.83 Net Income 72 164.17 Gross Margin 113 950.00


Enterprise Budgeting Enterprise budgeting is an ex-ante profitability analysis. It is similar to CRA in terms of format but different in terms of utility, as CRA is an ex-post approach. Enterprise budgets typically contain three sections: income, variable and fixed costs. Table 4 shows an example of an enterprise budget for organic cucumber production, handling, and marketing. The estimated income can be compared with the income of conventionally farmed cucumber or another postharvest technology system. Table 4. Enterprise budget for one hectare organic cucumber production and marketing

ITEM UNIT QUANTITY UNIT PRICE AMOUNT (P)

Income

Marketable yield kg 20 000 15.00 300 000.00 Total Income 300 000.00 Variable Costs Direct materials Seeds 3 500.00 Trellis pc 3 300 10.00 33 000.00 Liners/cushions kg 50 52.00 2 600.00 Plastic crates pc 30 100.00 3 000.00 Chicken manure ton 15 1 000.00 15 000.00 Fresh rice hull ton 10 500.00 5 000.00 Carbonized rice hull ton 1 500.00 500.00 Fermented plant juice 1 000.00 Fermented fruit juice 1 000.00 Organic sanitizer kg 5 200 1 000.00 Sub-total 65 600.00 Labor Plowing MAD 10 440 4 400.00 Harrowing MAD 8 440 3 520.00 Furrowing MAD 2 440 880.00 Bedding MAD 4 440.00 1 760.00 Planting MD 10 220.00 2 200.00 Manure application MD 8 220.00 1 760.00 Side dressing (3x) MD 12 220.00 2 640.00 Trellising MD 20 220.00 4 400.00 Irrigation MD 16 220.00 3 520.00 Spraying MD 16 220.00 3 520.00 Weeding MD 4 220.00 880.00 Roguing MD 6 220.00 1 320.00 Vine training MD 8 220.00 1 760.00 Harvesting MD 48 220.00 10 560.00 Packing/hauling MD 30 220.00 6 600.00 Others MD 20 220.00 4 400.00 Sub-total 54 120.00 Transportation 10 000.00 Interest (10% of DM cost) 6 560.00 Total Variable Costs 136 280.00 Fixed Costs Depreciation 11 465.83 Permanent laborers 2 4 500.00 18 000.00 Land rent month 2 6 000.00 12 000.00 Total Fixed Costs 41 465.83 Total Costs 177 745.83 Net Income 122 254.17 Income Above Variable Costs 163 720.00

MAD: man-animal-day; MD: man-day; 1 USD=40 PHP


Measures of net returns Enterprise budget commonly uses the following measures of returns: Returns above cash costs (RACC) represents the value of production left after paid-out costs. It usually refers to gross income, which represents the return to family labor, capital, land, and management.

RACC = Gross income – Cash costs

Returns above variable costs (RAVC) represents the value of production left after deducting the total variable costs that include material, labor and power costs.

RAVC = Gross income – Total variable costs

Returns to labor refers to the value of production allotted per unit of labor after deducting the variable costs, except labor from the gross returns. To be acceptable, return to labor must exceed the prevailing wage rate.

Returns to labor = days)(man input labor Total

costlabor RACV

Returns to cash refers to production value allotted per PHP or USD cash cost after deducting variable cost, except cash cost from gross returns. To be acceptable, returns to cash must exceed the prevailing interest rate being charged for credit.

Returns to cash = costcash Total

costcash RACV

Marginal benefit-cost ratio (MBCR) is used only if there are two technologies being compared because it involves the evaluation of the added benefit and cost. MBCR is the added benefit derived for every PHP or USD invested if an alternative technology will be used instead of the others. An MBCR with a value of two is desirable as this would mean that one PHP or USD investment will yield two in return or a net benefit of one (100%).


MBCR = costAdded

benefit Added

Where:

Added cost = cost of alternative technology – cost of farmer’s technology Added benefit = benefit of alternative technology – benefit of farmer’s technology

Break-even analysis Yield and output prices vary across time and location. Results under actual conditions may not always be similar with those obtained under experimental conditions; hence, there is a need to determine the minimum yield and output price that would enable recovery of at least the variable cost incurred in adopting the technology—a break-even analysis. It is also useful to determine the minimum yield and output price that would make profit from the technology higher (to a desired level, say, at least 25%) than obtained using the traditional technology. Break-even yield refers to the yield required to recover the variable costs incurred in production at given input and output prices. Given: RAVCt = Peso 70 000.00 TVCn = Peso 90 000.00 Pn = Peso 100.00 RAVCn = RAVCt

Where: RAVCt = return above variable cost of traditional technology TVCn = total variable cost of new technology Pn = output price of new technology RAVCn = return above variable cost of new technology Break-even yield (BY) from the new technology that would equate RAVCt and RAVCn can be computed as follows:

Pn x BY = TVCn + RAVCt

BY = 100.00 Peso

000.00 70 Peso000.00 90 Peso

= 1 600 kg

If the farmer targets a RAVCn that is at least 25% higher than RAVCt, the break-even plus yield can be calculated as follows:


BY + = n

tn

P

RAVC 1.25TVC

Peso 90 000.00 + (1.25) Peso 70 000.00 = ------------------------------------------ Peso 100.00 = 1 775 kg

Partial Budgeting Partial budgeting is another ex-ante measure used to assess the economic viability of a component technology. It is used to assess the effects of changing the method of a production or postharvest operation, such as applying lime or alum to control cabbage soft rot or replacing the packing system with a new method. The following steps construct a partial budget:

1) Describe carefully and exactly the change in methods/practices being considered. This should be done to avoid confusion about the exact nature of the change under study.

2) List and quantify the gains and losses resulting from the specified

change.Losses may be classified into: (a) extra costs or expenses that occur because of the proposed change, and (b) gross income or revenue foregone or any revenue that would be received under the present system but that would no longer be received if the change under consideration were to be implemented. Meanwhile, gains can also be classified into: (c) expenses or costs saved or costs that would have been incurred under the existing system but that would be avoided if the proposed change were to be adopted, and (d) extra gross income or revenue that arises as a consequence of the proposed change.

3) Calculate the change in profit: total gains minus total losses. If

total gains are greater than total losses, then the budget shows that the proposed change is profitable. If the reverse is true, then the change is not profitable.

4) List all the important non-monetary factors bearing on the choice.

In addition to the monetary factors, these non-monetary considerations will help in deciding to adopt the technology.

A partial budget includes only costs and outputs that change as a result of the proposed technology adoption (items which are not affected are excluded from


the analysis). It consists of four data sets: additional costs, income foregone/reduction in income, costs saved/reduction in costs, and additional income. A framework of a partial budget and an example of partial budget analysis are given in Tables 5 and 6: Table 5. Framework of a partial budget due to adoption of technology/innovation

Costs Benefits (A) Added Costs: Estimated additional costs incurred

(C) Costs Saved/Reduced Costs: Estimated costs saved

(B) Income Foregone/Reduced Returns: Estimated income foregone

(D) Added Income: Estimated additional income realized

(A + B) (C + D)

If (C + D) > (A + B), then the proposed change or technology increases the total gross margin (or net income if fixed costs are included). Table 6. Example of partial budget analysis for using guava leaf extract for complete control of bacterial soft rot in cabbages* (in P)

Costs Benefits

(A) Added Costs (C) Reduced Costs Labor for gathering guava leaves, preparing and applying leaf extract

300.00 Labor for trimming 100.00

Materials (mortar and pestle; vessels, knife, cotton)

450.00 Reduced waste disposal 100.00

(B) Reduced Income nil (D) Added Income 30% more cabbage as saving

from trimming (300 kg @ 30/kg)

9 000.00

Total 750.00 Total 9 200.00 Estimated Net Income Change: [(C + D) – (A + B)] = P 9 200.00 – 750.00 = 8 450.00 (per ton cabbage)

Note: *1,000 kg or 1 ton cabbage; without treatment-30% trimming loss due to soft rot; 1 kg = 30 PHP.

The Time Value of Money The time value of money means that a USD today does not have the same value a year later. In fact, “a USD received today is better than a USD received tomorrow.” This implies that present values are better than the same values in the future. The time dimension of money is taken into consideration through the use of discounting. Discounting is the process by which a future sum is translated into


present value. This is done by “reducing” the future values of costs and benefits to their present worth by multiplying these values by a discount factor. A discount factor (DF) can be obtained using the following formula:

DF = tr)(1

1

Where:

r = interest rate t = time (year)

Investment Analysis Investment analysis is done to check the attractiveness of a proposed investment. It projects the effects on income of a particular investment and estimates the return to capital. It follows the principle of discounted cash flow analysis. The analysis compares the streams of benefits and costs over the lifespan of the technology/investment. The initial investment is shown at the beginning of the projection and a residual value at the end. The analysis makes use of constant prices with off-farm income, home-consumed production and payments in kind. The steps in investment analysis are as follows:

1) Identify and estimate the total capital requirements of the project or innovation (capital needs for facilities, equipment, etc.; working capital; contingency capital; and other capital needs).

2) Identify and estimate equity and credit needs (alternative sources of capital and credit).

3) Estimate expected costs and returns of the project or innovation (taking into account the reliability of financial assumptions).

4) Develop projected income statement, balance sheet, and cash flow. 5) Determine appropriate discount rate. 6) Calculate financial measures of project worth. 7) Conduct sensitivity analysis.

Selection of discount rate To use discounted measures of investment appraisal, an appropriate discount rate has to be determined. The discount rate is usually the cost of capital to the farmer/entrepreneur for whom the appraisal is done. How is the cost of capital measured? If the project is 100% equity-financed, the cost of capital is equivalent to the opportunity cost of the invested equity (usually equivalent to the interest rate of a risk-free investment, e.g. bank deposit interest rate). On the other hand, if the project is 100% debt-financed, the rate is equivalent to the effective rate of the borrowed capital. If there are various sources of financing,


the cost of composite capital is used. Table 7 illustrates a calculation of the cost of composite capital with financing mix. Table 7. Sample calculation of the cost of composite capital Financing Source

Amount (million P)

Percentage Contribution

Individual Cost of Capital

Weighted Cost of Capital

Equity Bank 1 Loan Bank 2 Loan Grant in Aid

0.2 0.1 0.5 0.2

20% x 10% x 50% x 20% x

8% 18% 16% 8%

= = = =

1.6% 1.8% 8.0% 1.6%

Total Capitalization 1.0 100% Cost of Composite Capital

= 13.0%

Source: Jamandre (2007)

Financial measures of project worth The decision criteria used in assessing the worthiness of the project are: (a) net present value (NPV), (b) benefit-cost ratio (BCR), (c) internal rate of return (IRR), (d) profitability index, and (e) payback period (PP). NPV measures the present value of the streams of net benefits from the project. It is the difference between the sum of discounted streams of benefits and the sum of discounted streams of costs. In order for the investment to be acceptable, the NPV must be greater than zero. With mutually exclusive projects, the one with the highest NPV should be preferred. NPV can be computed as: n (Bt – Ct) n (NBt) NPV = ----------- or --------- t = 0 (1 + r) t t = 0 (1 + r) t Where: Bt = benefit at time t Ct = cost at time t NBt = net benefit at time t r = discount rate Name of Proposed Project: Vegetable Packinghouse & Cold Storage (VPCS) Project Project Proponent: Global Exporters Ltd. (GEL) Location: Phnom Penh, Cambodia Initial Capital Outlay: 14M USD

Financing Source: 80% Japan Eximbank Loan 20% GEL Equity

Cost of Capital or Hurdle Rate: 12% per annum Projected Benefit and Cost Stream (Cash Flow)

Year

Benefits (B)

Costs (C)

Net Benefits (NB)

2008-0 0 14.M (14.0)M 2009-1 10.0M 5 5

2010-2 15 7 8 2011-3 17 10 7


From the hypothetical example in the shaded box, NPV can be computed as: 14M 5M 8M 7M NPV at 12% = ------- + ------ + --------- + --------- (1+0.12)0 (1+0.12)1 (1+0.12)2 (1+0.12)3 NPV at 12% = 1.83M BCR gives the ratio between the discounted streams of benefits and the discounted streams of costs. An investment is worthwhile if BCR is greater than one. For mutually exclusive projects, choose the one with the largest BCR. BCR can be computed as: n (B

t) n (C t)

BCR = ----------- / ---------- t = 0 (1 + r) t t = 0 (1 + r) t Using the same example, BCR can be computed as: 0 10M 15M 17M + + + (1+0.12)0 (1+0.12)1 (1+0.12)2 (1+0.12)3 7M 10M 14M 5M 7M 10M + + + (1+0.12)0 (1+0.12)1 (1+0.12)2 0.12)3 32.99M BCR at 12% = = 1.06 31.16M IRR is the rate of interest or return that equates the NPV to zero. It represents the investment yield of the proposed project. It is the interest earned from all investments or resources being committed to the project. An investment is worthwhile if IRR is greater than the cost of capital. For mutually exclusive projects, choose the one with the largest IRR. IRR can be calculated by interpolation method (trial-and-error) using two discount rates (DRs) that give a positive NPV and a negative NPV.

BCR12% =


NPV of lower DR IRR = lower DR + difference between DRs ---------------------------------- Absolute difference of NPVs

Where: IRR = internal rate of return DR = discount rate NPV = net present value From the above example, a discount rate of 12% already yielded a positive NPV of 1.83M. The next thing to do is find a discount rate that will yield a negative NPV. This can be done using the “trial and error” method, trying several higher discount rates until a rate will yield a negative NPV. Using the same example, a discount rate of 20% yields a negative NPV of 0.22M. Using this example, IRR is computed as:

IRR = 12% +8% [1.83 / 2.05] IRR = 12% + 7.14% = 19.14%

Profitability index (PI) shows the relationship of the discounted net benefits derived from the project relative to the present value of its initial capital investment. It is mathematically represented as follows: NB1 NB2 NB3 …… NBn + + + (1+r)1 (1+r)2 (1+r)3 (1+r)n

PIr = ICI0 (1+r)0

Where:

PIr = profitability index at desired discounting or interest rate NB = net yearly benefits (Gross Benefits less Gross Costs) r = desired discounting rate ICI = absolute value of initial capital investment (usually incurred during year zero)

Using the discounted net benefits of VPCS Project, PI is computed as:


5M 8M 7M

+ + (1+0.12)1 (1+0.12)2 (1+0.12)3 PI 12% = 14M (1+0.12)0 PI at 12% = 1.13 Decision rule: Accept project if PI > 1; Reject if PI < 1 Payback period is used to determine the number of years and/or months it takes to recover the initial capital investment of the project. It is the point in time (years or months) where initial capital investment is already equal to the accumulated yearly net benefits or cash flow of the project. Payback period can be estimated as: Initial capital investment Payback period = -------------------------------- Average annual net benefits Using the same example, payback period can be estimated as: 14M Payback Period = -------------------------- = 2.09 years (5M + 8M + 7M) / 3 The payback formula (averaging method) is only applicable if the net benefits of the proposed project are nearly constant. If there is wide discrepancy in the net benefit figures, the interpolation method is used. To illustrate: Given the same benefit and cost streams of the above example: Year B C NB Cumulative NB

0 0 14M* (14M)

1 10 5 5 5

2 15 7 8 13

3 17 10 7 20

*Initial capital investment


By interpolation method: 1 x 2 years = 13 1 7 2 + x = 14 3 years = 20 By ratio and proportion, x can be calculated as follows: x 1 = 1 7 x = 0.14 If x is 0.14, PP is therefore 2 + 0.14 = 2.14 years The payback period often is computed using the non-discounted values of B/C stream. The projected B/C stream can be transformed into present values to solve the discounted payback period. This gives a more realistic estimate of recoupment period.

Sensitivity analysis Sensitivity analysis is done to predetermine factor changes in either input or output markets that could drastically affect the worth of an investment project. It is a “what-if” technique that measures how the expected values in the pro-forma financial statements will be affected by changes in the critical data inputs (i.e., input costs, price, volume of outputs, interest rates, etc.). Sensitivity analyses are useful for evaluating management strategy either in terms of cost reduction or market growth. Sensitivity analysis can be done to test the effect of the following on the financial measures of project worth: Shortfall in anticipated benefits, which can be attributed to a

decrease in price, volume sold, or both. Cost overrun due to increase in price of key inputs (material and

labor inputs), inflationary pressures, rise in interest rates and/or delayed project implementation.

Combination of A and B. For illustration purposes, the following sensitivity test is conducted to determine the effect of negative changes in the projected B/C using the VPCS project as example. Table 8 summarizes the original B/C schedule of the project.


Table 8. VPCS Project: original B/C schedule

YEAR GROSS BENEFIT

GROSS COST

NET BENEFIT

DGB @12%

DGC @20%

DNB @12%

DNB @20%

0-2008 0 14 M (14 M) 0 4M (14M) (14M) 1-2009 10 M 5 5 8.93M 4.46 4.46 4.17 2-2010 15 7 8 11.96 5.58 6.38 5.56 3-2011 17 10 9 12.10 7.12 4.99 4.05 TOTAL

42M 36M 6M 32.99M 31.16M 1.83M (0.22M)

BCR at 12% = NPW at 12% = PI at 12% = Payback = IRR = Based on the above original B/C predictions, test the effect of the following negative anticipation to the earning power (IRR) of the project. Assumption # 1 What if Gross Cost increases by 1% during the operating period (Year 1-3); Gross Benefits remain the same as projected. Table 9 shows the adjusted B/C schedule. Table 9. Adjusted B/C schedule based on assumption #1

Year GB GC NB DNB @ 12% DNB @ 20%

0 1 2 3

0 10M 15 17

14M 5.05 7.07 10.10

(14M) 4.95 7.93 6.90 NPV at 12% IRR = 18.50%

(14M) 4.42 6.32 4.91 = 1.65 NPV at 20%

(14M) 4.12 5.51 3.99 = (0.38)

1.06

1.83M

0.22M

1.13

19.14%


Assumption # 2 What if there will be a 1% shortfall in Gross Benefits yearly due to drop in selling price; Gross Costs remain the same as budgeted. Table 10 shows the adjusted B/C schedule. Table 10. Adjusted B/C schedule based on assumption #2


0 1 2 3

0 9.90M 14.85 16.83

14M 5 7 10

(14M) 4.90 7.85 6.83 NPV at 12% IRR = 17.94%

(14M) 4.38 6.26 4.86 = 1.50 NPV at 20%

(14M) 4.08 5.45 3.95 = (0.52)

Assumption # 3 What if there will be a 1% shortfall in Gross Benefits and 1% cost overrun during the actual operating period (simultaneous occurrence). Table 11 shows the adjusted B/C schedule. Table 11. Adjusted B/C schedule based on assumption #3


0 1 2 3

0 9.90M 14.85 16.83

14M 5.05 7.07 10.10

(14M) 4.85 7.78 6.73 NPV at 12% IRR = 17.31%

(14M) 4.33 6.20 4.79 = 1.32 NPV at 20%

(14M) 4.04 5.40 3.89 = (0.67)

Assumption # 4 What if annual Gross Benefits decrease and Gross Costs increase by 8%, respectively during the actual operating period as combined consequences of the following:

BENEFIT SHORTFALL (8%) Lower production and volume of sales Unfavorable selling price Too much giveaways Pilferage High mortality rate Others

COST OVERRUN (8%) Delayed operation Inflationary pressure Too low cost estimates compared to actual Higher wage rate Others

Table 12 shows the adjusted B/C schedule.


Table 12. Adjusted B/C schedule based on assumption # 4


0 1 2 3

0 9.2M 13.8 15.6

14M 5.4 7.6 10.8

(14M) 3.8 6.2 4.8 NPV at 12% IRR = 2.82%

(14M) 3.39 4.94 3.44 = (2.25) NPV at 20%

(14M) 3.72 5.96 4.52 = (0.20)

Results of the sensitivity test indicate that the proposed project is more “price sensitive” since its earning power (IRR) reacts faster to a price decline than to a cost hike. At a 1% shortfall in the anticipated yearly benefits (attributed to the drop in selling price), the project yields an IRR of 17.94% (Table 10). This is 1.2% lower than the original IRR estimate, which was computed at 19.14% (Table 8). In terms of project’s “cost sensitivity” (1% cost overrun), the project’s IRR slightly drops to 18.50% (only 0.64% lower than the original IRR) (Table 9). The third assumption reveals that if a 1% benefit shortfall and 1% cost overrun occurred simultaneously, the project’s yield on IRR is still acceptable at 17.31% (Table 11). This is because the investment yield is still greater than the discount rate (12%). These results indicate that the proposed project can still tolerate these two negative changes even if they should occur at the same time. The fourth assumption aims to assess the extent by which the proposed project can no longer tolerate the anticipated negative B/C changes in the future. Findings show that the proposed project is no longer viable if there will be an 8% increase in cost and 8% decrease in the anticipated annual benefits. Under this worst-case scenario, the project is no longer financially feasible since IRR (2.82%) is already less than the discount rate (12%) (Table 12). It is imperative for the project planner to incorporate into the overall project preventive measures and a contingency plan to prepare for extreme situations that may threaten the viability of the enterprise.

References Aragon, C.A. 1991. Cost and return analysis. In: Economic and Social Science Research

Methodologies in Agriculture. PCARRD. Book Series No. 113. Brown, E.O. and Librero, A.R. 1991. Measuring the economic viability of agricultural

technologies. PCARRD Book Series No. 118. Brown, E.O., Daite, R.B. and Cardenas, D.C. 2006. Ex-ante economic evaluation protocol

for evaluating R&D project worth: A simplified approach. PCARRD Information Bulletin No. 251.

Gittinger, J.P. 1991. Economic analysis of agricultural projects. 2nd edition. Washington DC: Economic Development Institute of the World Bank.

Jamandre, W.E. 2007. Conducting financial analysis of a proposed project. Paper presented in the training on HBME. CLSU, Munoz, Nueva Ecija, Philippines.


EXERCISES 1. Classification of cost and return items: Classify correctly the given cost and return items (left side table) and write your answers in the given columns on the right side table.

Cost and return analysis of cabbage production and marketing

ITEMS UNIT QTY ITEMS UNIT QTY INCOME

Cash Income Kg 12, 000 Vegetable consumed at home

Kg 100

Manure application MD 10 Seedling production MD 15 Mulching MD 10 Transplanting MD 20 Total Income COSTS

Variable Cash Costs Labor Inputs: Plowing MAD 10 Harrowing MAD 10 Bedding MAD 20 Perforated cartoon boxes kg 20 Fermented plant juice (FPJ) Fermented fruit juice (FFJ) Depreciation Fertilization - basal MD 10 Fertilization – sidedress MD 10 Irrigation MD 20 Miscellaneous labor MD 20 Total Labor Cost Material Inputs: Seeds 20 g 10 Animal manure tons 10 Spraying MD 10 Weeding MD 20 Land rent Harvesting MD 30 Packing MD 30 Fresh rice hull tons 10 Carbonized rice hull tons 10 Plastic mulch Total Material Inputs Transportation Miscellaneous (material)


Total Variable Costs Fixed Cash Cost Permanent laborers Total Fixed Cash Cost Fixed Noncash Cost Bio-organic fertilizer sacks 5 Total Fixed Costs TOTAL COSTS

NET INCOME NET INCOME

Gross Margin Gross Margin


2. Cost and return analysis: Fill up the given table below with your own example.

ITEMS UNIT QUANTITY UNIT PRICE VALUE Income Cash Income 0 0 (a) Total Cash Income 0 Noncash Income 0 0 (b) Total Noncash Income 0 (c) Total Income [(a) + (b)] 0 Costs Cash Costs Variable Cash Costs 0 0 (d) Total Variable Cash Costs 0 Fixed Cash Costs 0 0 (e) Total Fixed Cash Costs 0 (f) Total Cash Costs [(d) + (e)] 0 Noncash Costs Variable Noncash Costs 0 0 (g) Total Variable Noncash Costs 0 Fixed Noncash Costs 0 0 (h) Total Fixed Noncash Costs 0 (i) Total Noncash Costs [(g) + (h)] 0 (j) Total Costs [(f) + (i)] 0

Net Income [(c) – (j)] 0

Gross Margin (RAVC) [(c) – (d) –(g)] 0


3. Enterprise budgeting: Fill up the given table below with your own example.

ITEMS UNIT QUANTITY UNIT PRICE VALUE Income Cash Income 0 0 (a) Total Cash Income 0 Noncash Income 0 0 (b) Total Noncash Income 0 (c) Total Income [(a) + (b)] 0 Costs Cash Costs Variable Cash Costs 0 0 (d) Total Variable Cash Costs 0 Fixed Cash Costs 0 0 (e) Total Fixed Cash Costs 0 (f) Total Cash Costs [(d) + (e)] 0 Noncash Costs Variable Noncash Costs 0 0 (g) Total Variable Noncash Costs 0 Fixed Noncash Costs - depreciation 0 - labor of permanent workers 0 - land rent 0 (h) Total Fixed Noncash Costs 0 (i) Total Noncash Costs [(g) + (h)] 0 (j) Total Costs [(f) + (i)] 0

Net Income [(c) – (j)] 0

Gross Margin (RAVC) [(c) – (d) –(g)] 0


4. Partial budgeting: Perform partial budget analysis using your own results/example.

Partial budget analysis of MAP of tomato (modify using own results/example)

COSTS QTY PRICE VALUE BENEFITS QTY PRICE VALUE

(A) Added Costs ($) (C) Reduced Costs ($)

- Plastic bags 15,000 0.025 375 (none)

- Labor in packing (3.3kg/min)

1 200 200

- Storage cost 15,000 0.05 750

Sub Total 1325 Sub Total 0

(B) Reduced Return ($)

(D) Added Return ($)

(none) - WL decrease 2250 1 2250

Sub Total 0 Sub Total 2250

Total 1325 Total 2250

Estimated Net Change $925.00

Partial budget analysis of using guava leaf extract to control cabbage soft rot (modify using own results)

COSTS QTY PRICE VALUE BENEFITS QTY PRICE VALUE (A) Added Costs ($) (C) Reduced

Costs ($)

- Labor; collection and preparation

0.5

- Labor in applying solution

200

- Material cost, e.g. mortar

- etc.

Sub Total Sub Total 0

(B) Reduced Return ($)


0

Sub Total Sub Total 0

Total Total 0


Analysis of Economic Viability of Processing Agricultural Products

Tanachote Boonvorachote

Department of Agro-Industry Technology, Faculty of Agro-Industry, Kasetsart University, Bangkok, Thailand

Introduction Economic viability of processing technologies can be measured using methodologies described earlier for fresh produce handling technologies, particularly the cost and return analysis. This paper focuses on processing cost accounting and cost-profit-volume analysis. Capital budgeting and risk assessment are also introduced.

Cost Accounting Cost accounting addresses the demands of both financial and management accounting by providing product cost information to external parties (e.g. stockholders, creditors, and regulatory bodies) for investment and credit decision-making and to internal managers who are responsible for planning and evaluating performance. From the internal and external business perspectives, cost accounting information more specifically serves the following purposes, as illustrated in Figure 1. Inventory valuation and income determination (cost recording,

financial statement) Planning and control (budget, performance reports) Decision-making Financial accounting (third parties, generally accepted accounting

principles or GAAP) Managerial accounting (planning, control, decision-making)


Figure 1. Functions of cost accounting for financial and management accounting.

Type of enterprise Production costs differ with the type of enterprise, of which there are two: manufacturing (processing)/merchandising operations or firms providing services. The materials or supplies and conversion costs of manufacturers and service companies must be assigned to output to determine the cost of product and cost of goods sold or services rendered. Cost accounting provides the structure and process for assigning material and conversion costs to products and services. A processing enterprise must account for raw material, work in process, and finished goods to maintain control over the production process. An accrual accounting system is essential for such an enterprise, so that total production costs can be accumulated as goods flow through the manufacturing process. Cost accounting techniques help reveal ways to reduce costs. Service firms need only to track their work in process (incomplete jobs) since they normally have few, if any, raw material costs other than supplies for work not started. Because services generally cannot be warehoused, costs of finished jobs are usually transferred immediately to the income statement to be matched against job revenues rather than being carried on the balance sheet in a finished goods account. Cost accounting for this type of enterprise will not be tackled in this paper.

Processing costs Cost is the cash amount paid for receiving and producing goods, including loss incurred in the production process. Cost is an asset (unexpired cost), expense (expired cost can create benefits) and/or loss (expired cost cannot create any benefit).


The processing process can be viewed in three stages: Raw material inventory (work not started)

- Direct raw material inventory - Indirect raw material inventory

Work in process (WIP) inventory (work started but not completed) Finished goods (FG) or product inventory (units fully completed) Processing costs can be separated into three components:

1) Direct material (DM): Any identifiable part of product; cost of all materials used to manufacture a product. However, some material costs are not economically traceable. Such costs are treated and classified as indirect material.

2) Direct labor (DL): Refers to individuals who work specifically on

manufacturing a product. It is also considered work that directly adds value to the final product. It consists of wages or salaries paid to production workers or employees directly involved in producing the product. Such wages and salaries must be traceable to the product or service. Direct labor includes basic compensation, production efficiency bonuses, and the employer’s share of Social Security and Medicare taxes. In addition, if a company’s operations are relatively stable, direct labor cost should include all employer-paid insurance costs, holiday and vacation pay, pension and other retirement benefits. Indirect labor refers to wages of production workers during off-production, wages or salaries for supervisors, engineers, and cleaning and maintenance workers.

3) Processing/manufacturing overhead: Overhead (OH) is the

production costs except direct material and direct labor, i.e. costs indirectly incurred in producing a product. It includes indirect material, indirect labor, and all other costs incurred in the processing area, such as machinery and equipment depreciation, rental, overhead supplies, utilities (electricity, water), wages of quality control, maintenance and office staff, property tax, etc. OH can be either variable or fixed, based on how it behaves in response to changes in production volume or some other activity measures. Variable OH includes costs of indirect material, indirect labor paid on an hourly basis (e.g. wages for forklift operators, material handlers, and other workers who support the production, assembly, and/or service process), lubricants used for machine maintenance, and the variable portion of factory electricity charges. Depreciation calculated using either the unit-of-production or service life method is also a variable cost; this depreciation method reflects a decline in


machine utility based on usage rather than time passage and is appropriate in an automated processing plant.

Cost accounting methods Costing can be done based on the nature of the production process (job order costing or processing costing), component (absorption costing/full costing, direct costing, or prime costing), or amount (actual costing, normal costing, or standard costing).

Job order costing This product cost calculation is determined by accumulated cost based on different production batch, production lot, or specific order. Product costing is concerned with cost identification, cost measurement, and product cost assignment. Costs are accumulated individually on a per-job basis. A job is a single unit or group of units that is identifiable as being produced to distinct customer specifications. Each job is treated as a unique cost entity or cost object. Costs of different jobs are maintained in separate subsidiary ledger accounts and are not added together in the ledger. Actual direct material and actual direct labor costs are combined with an overhead cost that is computed as a predetermined overhead rate multiplied by some actual cost driver (e.g. cost of quantity of materials used or number of direct labor hours required). Normal cost valuation is used because, although actual direct material and direct labor cost are fairly easy to identify and associate with a particular job, overhead costs usually are not traceable to specific jobs and must be allocated to production. The output of any job can be a single unit or multiple similar or dissimilar units. If multiple outputs are produced, a per-unit cost can be computed only if the units are similar or if costs are accumulated per separate unit, such as through an identification number. Details and documents in job order costing are: Material requisition form Job order cost sheet Employee time sheets Overhead Completion of production


Processing costing This product cost calculation is determined by accumulated cost based on production department or period, from start of production until finished goods are ready for delivery. Assigning costs to units of production is an averaging process. The easiest way to determine a product’s actual unit cost is to divide a period’s departmental production costs by that period’s departmental production quantity. This average is expressed by the following formula:

Unit Cost = Production Costs / Production Quantity However, this formula applies only if goods are completed at the end of a period.

Material requisition form When material is needed to begin a job, a material requisition form (Table 1) is prepared so the material can be released from the warehouse and sent to the processing area. This source document indicates the types and quantities of material to be placed into production. Such documents are usually pre-numbered and come in multiple-copy sets so that completed copies can be maintained in the warehouse, in the production department, and with each job. Table 1. Example of a material requisition form

No. 099

Date ____/____/____

Job Number ________________ Department ________________

Authorized by _____________ Issued by __________________

Received by ________________ Inspected by _______________

Item No.

Description Unit Measure

Quantity Required

Quantity Issued

Unit Cost

Total Cost

Completed material requisition forms verify material flow from the warehouse to the requisitioning department and allow responsibility for material cost to be traced to users. Although hard copy material requisition forms may still be used, it is increasingly common for this document to exist only electronically.


The following procedure is usually followed in processing a material request form:

1) Prepare the form so the material can be released from the warehouse and sent to the production place.

2) Renumber the document and multiple-copy set for control. 3) After issuing material, related cost is sent to WIP inventory.

Job order cost sheet The source document that provides virtually all financial information about a particular job is the job order cost sheet (Table 2). The set of job order cost sheets for all incomplete jobs composes the WIP inventory subsidiary ledger. Total costs contained on the job order cost sheets for all incomplete jobs should reconcile to the WIP inventory control account balance in the general ledger. The top portion of a job order cost sheet includes a job number, a description of the task, customer identification, various scheduling information, delivery instructions, and contract price. The remainder of the form details actual costs for material, labor, and applied overhead. The form also might include budgeted cost information, especially if such information is used to estimate the job’s selling price.


Table 2. Example of a job order cost sheet

Entity Name

Job Order Cost Sheet

Customer Name: _____________________ Order #: _____________________

Product Name: _____________________ Production Date: ______________________

Model/Type: _____________________ Starting Date: ______________________

Quantity: _____________________ Requested Date: ______________________

Finished Date: ______________________

Applied OH Based on # of

Direct Material (Est Cost = xxx)

Direct Labor (Est Cost = xxx)

Labor Hours (Est Cost = xxx)

Date Source # Amount Date Source # Amount Date Source # Amount

Total (1) Total (2) Total (3)

Summary (Total Est Cost = xxx)

Sales XXX Amount

Completion of Production Costs

Direct Material (1)

Direct Labor (2)

Overhead (3) XXX

Gross Profit XXX


Employee time sheet An employee time sheet (Table 3) indicates the jobs on which each employee worked and the direct labor time consumed. The time sheet should be completed manually by employees; such time sheets are most reliable if the employees fill them in as the day progresses. Work arriving at an employee station is accompanied by a tag or bar code specifying its job order number. The time work is started and stopped as noted on the time sheet. These time sheets should be collected and reviewed by supervisors to ensure the information is accurate. The following procedure is usually followed: Indicate the jobs on which each employee worked and direct labor

time consumed. Employees complete the time sheet manually, including overtime. Collect the time sheets; supervisors review them. Hours not spent directly on the production job should be recorded as

overhead. Table 3. Example of an employee time sheet

For Week Ending: _______________________

Department: _______________________

Employee Name: _______________________

Employee ID No.: _______________________

Type of Work Job Start Stop Day Total Hours

Code Description Number Time Time (circle)

M T W Th F S S

M T W Th F S S

M T W Th F S S

Grand Total

_______________________ _______________________

Employee Signature Supervisor Signature


Overhead Overhead costs can be substantial in processing firms. Actual OH incurred during production is included in the manufacturing overhead control account (Table 4). If actual overhead is applied to jobs, the cost accountant will wait until the end of the period and divide the actual cost incurred in each designated cost pool as a related measure of activity or cost driver. Actual OH should be applied to jobs by multiplying the actual overhead rate by actual measure of activity associated with each job. More commonly, normal costing is used, and OH is applied to jobs with one or more annualized predetermined OH appropriated rates. OH is assigned to jobs by multiplying the predetermined rate by the actual measure of the activity based on the cost incurred for each job during the period. If a job is completed within a period, OH is applied at completion of production so that a proper product cost can be transferred to FG inventory. If a job is not completed at the end of period, OH must be applied at that time so that WIP inventory on the period-end balance sheet contains costs for all three products’ elements (DM, DL and OH). Table 4. Example of an overhead sheet

Overhead Sheet

Month: _______________________

Department: _______________________

Description Cost

Indirect Labor

Office Rent

Maintenance

Depreciation

Property Tax

Material Supplied

Other ______________

Total Overhead xxx

Total Labor Hours xxx

Applied Overhead Cost/Labor Hour XXX

Completion of production When a job is completed, its total cost is transferred to (debited to) FG inventory and removed from (credited to) WIP inventory. Job order cost sheets for completed jobs are removed from the WIP subsidiary ledger and become the


subsidiary ledger for the FG inventory control account. When a job is sold, its cost is transferred from FG inventory to cost of goods sold. EXAMPLE 1 Company AA began operations on May 1, 20xx. Its WIP account (a/c) on May 31 is as follows:

WIP A/C DM $144,200 FG ?????? DL $384,000 App OH $422,400 The company applied OH on the basis of DL cost. Only one job was still in process on May 31. That job had $33,350 in DM and $93,600 in DL cost. Questions:

1. What was the predetermined OH application rate? 2. What was the balance in WIP inventory at the end of May? 3. What the total cost was of jobs completed (FG) in May?

Answers:

1. App OH Rate bases on DL $422,400/$384,000 = 1.1 2. WIP balance = $229,910; 3. FG = $720,690

TT ($) WIP ($) FG ($)

DM 144,200 33,350 110,850

DL 384,000 93,600 290,400

App OH 422,400 102,960 319,440

(93,600*1.1) (290,400*1.1)

950,600 229,910 720,690


EXAMPLE 2 For 20xx, Company BB decided to apply OH to units based on DL hours. BB WIP inventory account on January 31 appeared as follows:

WIP A/C Beginning $136,000 FG ?????? DM $261,400 DL $175,000 App OH $137,200 The beginning balance of $136,000 contained 5,000 DL hours. During January, 14,000 DL hours were recorded. Only one job was still in process on January 31. The job had $41,500 in DM and 3,700 DL hours assigned to it. Questions:

1. What was the predetermined OH application rate for 20xx? 2. What was the average DL rate per hours? 3. What was the balance in WIP inventory at the end of Jan.? 4. What the total cost was of jobs completed (FG) in Jan.?

Answers:

1. App OH Rate bases on DL/hr = $137,200/$14,000 = $9.8 2. Ave DL rate/hr = $175,000/$14,000 = $12.50 3. WIP balance = $124,010 4. FG = $585,590

TT ($) WIP ($) FG ($)

1-Jan 31-Jan 31-Jan

BF 136,000

DM 261,400 41,500 219,900

DL 175,000 46,250 128,750

App OH 137,200 36,260 1,261,750

709,600 124,010 585,590

App OH Rate bases on DL/hr 9.80 a)

Ave DL/hr 12.50 b)

WIP BF Previous month DM 24,500

Previous month DL 62,500

App OH Rate - WIP BF 49,000

136,000


EXAMPLE 3 Company BB - during April 20xx, the following information was obtained relating to operations and production:

1. DM purchased on account - $180,000. 2. DM issued to jobs – $163,800. 3. DL hours incurred – $3,400. All direct factory employees were paid $9 per hour. 4. Actual factory OH costs incurred for the month totaled $68,700. The OH consisted of $18,000 of supervisory salaries, $21,500 of depreciation charges, $7,200 of insurance, $12,500 of indirect M (IDM), and $95,000 of utilities. Salaries, insurance, and utilities were paid in cash and IDM was taken from supplies inventory. 5. OH is applied to production at the rate of $20 per DL hour. Beginning balance of RM inventory and WIP inventory were, respectively, $3,000 and $12,000. Ending WIP inventory was $4,700.

Questions:

a) Prepare journal entries for Transactions 1-5 b) Determine the balance in RM inventory at the end of April. c) Determine the cost of FG during April. If 10,000 similar units were completed. What was the cost per unit? d) What is the amount of underapplied OH or overapplied OH at the end of the month?


Answers:

a) DR AMT ($) CR AMT ($)

1 RM 180,000 Cash 180,000

2 WIP (DM) 163,800 RM 163,800

3 WIP (DL) 30,600 Cash 30,600

( 3400 *9 )

4 Manufacturing OH - Sup Sal 18,000

Manufacturing OH - Insurance 7,200

Manufacturing OH - Utilities 9,500 Cash 34,700

Manufacturing OH - Dep 21,500 Acc Dep 21,500

Manufacturing OH - IDM 12,500 Supplies 12,500

(34700 + 21500 + 12500 = 68700) -

5 WIP (OH) 68,000 Manufacturing OH 68,000

b) RM - 4/30 19,200

BF - 4/1 Add Less CF – 4/30

RM 3,000 180,000 (163,800) 19,200

WIP 12,000 262,400 (269,700) 4,700

FG -0- 269,700 -0- 269,700

c) DR CR

FG inventory 269,700 WIP inventory 269,700

# of FG = 10,000 and FG/unit = 26.97

d) Underapplied OH (Loss) = 700

Cost-Profit-Volume Analysis This helps in calculating the sales volume necessary to achieve a desired target profit, stated as either a fixed or variable amount of costs.

Target Profit = Total Revenue – Total Costs = p*Q – (Q*V+F)

Cost-profit-volume analysis or break-even point analysis considers the following:


Sale, unit price (p) Production units (Q) Variable costs or Cost of Goods Sold (V) and fixed costs (F) e.g.

rental fee, etc. Profit planning Break-even point analysis (QBE)

Profit = Total Revenue – Total Costs = 0

= p*QBE – (QBE*V+F)

Hence, QBE = F / ( p – V )

Capital Budgeting Capital budgeting techniques help in analyzing the potential additions to fixed assets. They are long-term decisions and involve large expenditures. Capital budgeting analysis is very important to a firm’s future. The steps in capital budgeting are as follows: Estimate cash flows (inflows & outflows). Assess risk of cash flows. Determine the appropriate cost of capital (WACC). Find the net present value (NPV) and/or the internal rate of return

(IRR). Accept if NPV > 0 and/or IRR > WACC.

Risk Assessment This is the process of analyzing the uncertainty about differences between the expected and future returns from an investment. Another way in which risk can be included in the decision process is through the use of sensitivity analysis. Sensitivity analysis is a process of determining the amount of change that must occur in a variable before a different decision would be made. In the capital budgeting analysis, some variables (e.g. discounted rate, annual net cash flows, or a project life) can be varied. All variations in selected variables will affect NPV and IRR results. The impact of each variable on a project’s NPV and IRR value can be observed. In the cost-profit-volume analysis, risk assessment can be done by varying the amount of fixed or variable costs. Figure 2 shows that a higher fixed cost (FC) will give a project with higher variation in profit (dark shade) and loss (light shade).


Figure 2. Relationship between fixed cost (FC) and potential loss (yellow shade) and profit (blue shade) of an enterprise

References Raiborn, K. and Prather, K. 2006. Cost Accounting, 6th edition, Thomson South-Western

Sales

$ Rev.

TC

FC

QBE Sales

$ Rev.

TC

FC

QBE

} Profit


Financial Analysis of Projects: The Solar Dryer

Christian Genova II Socioeconomics Unit, AVRDC – The World Vegetable Center,

Shanhua, Tainan, Taiwan, ROC

Introduction This paper describes the stepwise approach on how to conduct financial analysis for solar dryer technology: formulating cash flow tables, verifying sustainability, and looking at the financial returns of the solar dryer. The financial analysis is made up of a series of tables that collect the financial flows of the investment, broken down by total investment, operating costs and revenue, sources of financing, and cash flow analysis for financial sustainability.

Financial Analysis Steps in conducting a financial analysis should be based on the discounted cash flow approach. A system of accounting tables should show cash inflows and outflows related to:

Total capital/investment costs (the amount expended) Total operating costs and revenues (the potential benefits) Financial return on the investment costs: FNPV(C) and FRR(C) Sources of financing Financial sustainability Financial return on national capital: FNPV(K) and FRR(K)

To correctly draw up the tables, careful attention must be paid to the following elements:

Useful economic life of the solar dryer. This refers to the period of actual usefulness of the solar dryer. The choice of economic life may have an extremely important effect on the results of financial evaluation as it affects the calculation of the main indicators of the analysis.

Investment costs. Investment costs include fixed assets (land,

buildings, equipment), pre-production expenses (licenses, patents, land clearing, and flooring), variations in working capital (cash, stocks, receivables, and current liabilities), and residual value, which appears as a single positive item in the last year of the useful lifetime (Table 1).


Operating costs and revenue. This includes all the operating costs (raw materials, labor, electricity, maintenance), and any possible revenue sources (sales) after adjusting for applicable income taxes and the effect of accounting elements such as depreciation and amortization (Table 2).

Sources of financing. This includes private financing, public

contributions (local, national, community), loans, and other sources of financing (Table 4).

Verification of financial sustainability. The financial plan should

demonstrate the self-financing capacity of the solar dryer operation and show it has sufficient funds for investment, operation, and maintenance, after including taxes and loan repayments/reimbursements (Table 5).

Selection of appropriate discount rate. A suitable discount rate

must be identified to discount financial flows to the present and to calculate net present value. This rate is commonly based on a company’s weighted average cost of capital, or the rate that a company is expected to pay to finance its assets.

Determination of the main performance indicators (IRR ad

NPV) (Table 3 and Table 6).

Sensitivity analysis (Table 7)

The Solar Dryer This section illustrates the investment for the development of a solar dryer. The proposed methodology is mainly focused on indirect type solar dryers. However, the general principles may also be applied to other types, using assumptions and specificity not dealt with here. The framework for calculating the unit cost of drying will use the one proposed by Purohit et al (2006), taking into account the operational factors (e.g. initial and final moisture content, drying temperature, drying time, harvesting period of the agricultural product, etc.) and financial factors (e.g. capital cost, annual repair and maintenance cost, capacity utilization factor, discount rate, wholesale selling price, etc.).

Objectives The socioeconomic objectives of solar drying are generally related to enhancing storage life, minimizing losses during storage, reducing transportation costs, and


minimizing product losses due to inadequate drying, fungal growth, encroachment of pests, birds, rodents, etc.

Parameters It would be helpful to provide an accurate description of the following data:

A list of the annual quantities of production input in terms of raw materials, services, workforce (disaggregated according to category and specialization), supplemental energy source, mass of solar dried product in a batch, initial and final moisture contents of the agricultural crop on wet basis, drying and ambient temperatures, daily solar radiation availability, market price of the solar dryer, annual capacity utilization factor (which is the harvesting season expressed as a fraction of the total number of days in a year), useful lifetime, and the wholesale selling price of the dried agricultural product.

The turnover, gross operating margin, gross and net profit, cash-

flow, debt ratio and other balance sheet indicators.

A description of the production and auxiliary machinery and equipment, if there are any.

Input parameters in the calculations: Unit a. Operational factors

Mass of solar dried product in a batch Kg

Initial moisture content of the product on wet basis Fraction

Final moisture content of the product on wet basis Fraction

Harvesting time (number of days per year) Days

Drying time Days

Drying temperature °C

Ambient temperature °C

Daily solar radiation availability kW h/m2

b. Financial factors

Market price of collector LCU/m2

Annual capacity utilization factor of the dryer Fraction

Useful lifetime of the dryer Year

Wholesale selling price of the dried product LCU/kg

Notes: LCU=local currency unit, kg=kilogram, °C=degree Celsius, MJ=megajoule, m2=square meter.


Assumptions

Latent heat is the amount of energy that is required to transform 1 kg of water at its boiling point 100C completely into gas. The latent heat of vaporization of water is 540 cal/g at 100C or 2.26 MJ/kg.

Daily solar radiation varies and this greatly affects the drying time of any agricultural crop. In the financial analysis, this drop in temperature inside the solar dryer chamber during off-sunshine hours meant some thermal energy is required for sensible heating during other days of drying. A conservative 50% (additional) thermal energy is thereby assumed for sensible heating of the agricultural crop.

Overall efficiency of drying is 25%. Other miscellaneous costs that may arise are estimated at 10%

of the solar dryer cost. Annual repairs and maintenance is 5% of the solar dryer capital

cost. Discount rate is at 10%.

Some hypotheses for quantification of unit cost: Unit Value a. Operational factors

Fraction of the sensible heating requirement of the product on the first day that is required for sensible heating on other days of drying

Fraction 0.5

Latent heat of vaporization of water MJ/kg 2.26

Overall thermal efficiency of the solar dryer Fraction 0.25

b. Financial factors

Cost of the remaining components of the indirect type solar dryer as a fraction of the collector cost

Fraction 0.1

Annual repair and maintenance cost as a fraction of capital cost Fraction 0.05

Discount rate Fraction 0.1


Predictions of crop drying times are also required for this evaluation to determine how many times the solar dryer may be used effectively during the year. These values are relevant for the financial evaluation, as these are the parameters that will be included in the calculation of the unit cost of drying later on. The unit cost of drying (Equation 4) is a function of the annualized capital cost of the solar dryer and the total annual amount of dried agricultural product. The minimum useful energy required for drying, which is estimated as the sum of useful energy required for sensible heating of the product and the useful energy required for evaporation of moisture in the product, will also be computed and used in the calculation of the capital cost. Equation 1:

3101868.420.080.0 XMCp ci Equation 2:

fg

ci

cfciadp

ci

cf

d

sdco h

M

MMTTC

M

M

I

MfpC

111

1

11

Where: Co = capital cost of solar dryer (of drying capacity Msd) pc = market price of solar dryer per unit aperture area (LCU/m2) f = cost of the remaining components of the indirect type solar dryer

as a fraction of the collector cost (fraction) I = average daily solar radiation availability (MJ/m2) d = overall thermal efficiency of the solar dryer (fraction) Mcf = final moisture content of the product on wet basis (fraction) Mci = initial moisture content of the product on wet basis (fraction) Cp = specific heat of raw product (MJ/kg/C) Td = drying temperature (C) Ta = ambient temperature (C) ξ = fraction of the sensible heating requirement of the product on the

first day that is required for sensible heating on other days of drying (fraction)

hfg = latent heat of vaporization of water (MJ/kg) Equation 3:

11

1

t

t

d

ddCRF

Equation 4:

sd

od

MCUF

mCRFCUC

365


Where: UCd = unit cost of solar drying of the product (LCU/kg) Co = capital cost of solar dryer (LCU) CRF = capital recovery factor m = annual repair and maintenance cost as a fraction of capital cost

(fraction) CUF = capacity utilization factor (fraction) τ = time required for drying single batch of the product (days) Msd = per batch drying capacity of solar dryer (kg) d = discount rate (fraction) t = useful lifetime of the solar dryer (years)

The financial analysis can be undertaken after the unit cost of drying 1 kg of agricultural crop has been derived, and the other input parameters gathered. An example of a financial analysis of a solar dryer is provided following the references. Further information on financial analysis can be found in the guide on financial analysis of investment projects (European Commission, 2008), key areas of economic analysis of projects (ADB, 2003), the ADB’s website on applied microeconomic studies:

Reference materials on economic analysis of operations http://www.adb.org/Economics/reference-materials.asp Learning program materials http://www.adb.org/Economics/2007-Econ-Analysis-Training.asp

Other reference materials on assessing solar dryers include Sreekumar et al (2008), Fuller et al (2006), Mwithiga and Kigo (2006), Kumar and Durairaj (2001), Al-Amri (1997) and Tiris et al (1995).

References ADB (Asian Development Bank). 2003. Key areas of economic analysis of projects: An

overview. Manila, Philippines: ADB Al-Amri, A.M.S. 1997. Thermal performance tests of solar dryer under hot and humid

climatic conditions. AMA, Agricultural Mechanization in Asia, Africa and Latin America 28(3):56-60.

European Commission. 2008. Guide to cost-benefit analysis of investment projects Structural Funds, Cohesion Fund and Instrument for Pre-Accession: Final Report Submitted by TRT Trasporti e Territorio and CSIL Centre for Industrial Studies. DG Regional Policy, European Commission.

Fuller, R.J., Lhendup, T. and Aye, L. 2006. Technical and financial evaluation of a solar dryer in Bhutan. Dunedin, University of Otago.

Gittinger, J.P. 1982. Economic Analysis of Agricultural Projects. Baltimore: International Bank for Reconstruction and Development.


Kumar, V.J.F., and Durairaj, C.D. 2001. Performance evaluation of solar dryers in drying vermicelli. Madras Agricultural Journal 88:7-12.

Mwithiga, G. and Kigo, S.N. 2006. Performance of a solar dryer with limited sun tracking capability. Journal of Food Engineering 74(2):247-252.

Purohit, P., Kumar, A., and Kandpal, T.C. 2006. Solar drying vs. open sun drying: A framework for financial evaluation. Solar Energy 80(12):1568-1579.

Sreekumar, A., Manikantan, P.E. and Vijayakumar, K.P. 2008. Performance of indirect solar cabinet dryer. Energy Conversion and Management 49(6):1388.

Tiris, C., Tiris, M. and Dincer, I. 1995. Investigation of the thermal efficiencies of a solar dryer. Energy Conversion and Management 36(3):205-212.


EXAMPLE: Consider an indirect solar dryer with the following parameters1:

Equipment cost: US$ 1,700 Administrative cost: 1% of solar dryer cost

Land clearing and flooring + labor costs: US$ 100 Salary: 5% of solar dryer cost

Residual or salvage value in the 5th year: US$ 340 Unit farm gate price of fresh chili2: US$ 1.03/kg

Unit production cost of dried chili (UCd): US$ 9.98/kg

Symbol Operational factors

Msd Mass of solar dried product in a batch 60 Kg

Mci Initial moisture content of the product on wet basis 0.84 Fraction

Mcf Final moisture content of the product on wet basis 0.02 Fraction

Harvesting time (number of days per year) 180 Days

Drying time 7 Days

Td Drying temperature 39 °C

Ta Ambient temperature 34 °C

I Monthly solar radiation (AVRDC Jan-Aug 2008 average) 4.37 kW h/m2

Fraction of sensible heating requirement of product on the first day that is required for sensible heating on other days of drying

0.50 Fraction

hfg Latent heat of vaporization of water 2.26 MJ/kg

d Overall thermal efficiency of the solar dryer 0.30 Fraction

pc Market price of collector (pc=US$ 1700/3m2 average collector area of solar dryer)

567 US$/m2

CUF Annual capacity utilization factor of the dryer (CUF = harvesting time / 365)

0.49 Fraction

t Useful lifetime of the dryer 5 Year

Wholesale selling price of the dried product3 5.74 US$/kg

f Cost of the remaining components of the indirect type solar dryer as a fraction of the collector cost

0.10 Fraction

m Annual repair and maintenance cost as a fraction of capital cost 0.05 Fraction

d Discount rate 0.10 Fraction

Computation: (1)

3101868.420.080.0 XMCp ci Cp = {0.80*0.84 + 0.20}4.1868*10-3 Cp = 0.0037 (2)

1 The values used in this example are for illustrative purpose only. 2 Average farm gate price of fresh chili in Asia, 2005: US$ 1.03/kg (FAOSTAT, 2008) 3 Average wholesale price of dried chili in Asia, 2005: US$ 5.74/kg (FAOSTAT, 2008)


fg

ci

cfciadp

ci

cf

d

sdco h

M

MMTTC

M

M

I

MfpC

111

1

11

Co =

26.284.01

02.084.050.017134390037.0

84.01

02.01

30.0*37.4*7

600.10)][567(1

Co = 49,054.89 (3)

11

1

t

t

d

ddCRF

=

11.01

1.011.05

5

= 0.2638 (4)

sd

od

MCUF

mCRFCUC

365

=

60*

7

49.0*365

05.02638.089.054,49

= 9.98


Table 1. Components of investment costs for solar dryer (in US$) Year

Particulars 1 2 3 4 5 Land Building Equipment 1700 Residual value 340

Total fixed assets (A) -1700 0 0 0 340 Pre-production expenses 100

Total start-up costs (B) -100 0 0 0 0 Current assets (receivables, stocks,

cash)

Current liabilities Net working capital © Total investment cost (A) + (B) + (C) -1800 0 0 0 340 Pre-production expenses: These relate to licenses or patent applications, land clearing and flooring, e.g. US$100 of land clearing and flooring was provided by the community. Residual value: Always included at the end year. It is an inflow so has a positive value, while all the others are outflows with

negative values. Current assets: These are funds, not flows. Table 2. Components of operating costs (in US$)

Year Particulars 1 2 3 4 5

Raw materials -1589 -1589 -1589 -1589 Cost of drying chili -15398 -15398 -15398 -15398 Salaries and wages -85 -85 -85 -85 Utilities (e.g. electric power, fuel) * Maintenance * Administrative costs -17 -17 -17 -17

Total operating costs (D) 0 -17089 -17089 -17089 -17089 Sales 8856 8856 8856 8856

Total operating revenues (E) 0 8856 8856 8856 8856 Net operating revenue (E) – (D) 0 -8233 -8233 -8233 -8233

Net operating revenue = 0 during the investment phase.

Assumptions: * No supplemental energy source. Maintenance cost is already included in the computation of unit cost of dried chili (refer to equation 1). Drying conditions and supply of fresh chili is constant. No postharvest loss. The costs and revenues were calculated by:

Raw materials: [(180 days/7 days X 60kg) X US$1.03 per kg]

Cost of drying chili: [(180 days/7 days X 60kg) X US$9.98 per kg]

Sales: [(180 days/7 days X 10kg4) X US$5.74 per kg]

Salaries and wages: US$1,700 X 0.05

Administrative costs: US$ 1,700 X 0.01

Table 3. Financial return on investment (in US$) 4 The amount of water after drying (x) was computed by 02.0

6.9

xkg

x, where 9.6kg is the dry

mass (60kg – 60kg*0.84 initial moisture content) and 0.02 is the final moisture content of chili. The volume of dried chili was 9.6kg + 0.20 10kg.


Particulars Year

1 2 3 4 5

Total operating revenues (E) 0 8856 8856 8856 8856

Total operating costs -17089 -17089 -17089 -17089

Total investment cost -1800 0 0 0 0

Total expenditures (F) -1800 -17089 -17089 -17089 -17089

Net cash flow (E) – (F) -1800 -8233 -8233 -8233 -8233

Financial internal rate of return (FRR/C)* #NUM!

Financial net present value (FNPV/C) ($25,361.37)

Note: This table measures the capacity of operating revenues to sustain the investment costs. It does not contain other outflows like interest payments, loan reimbursements and taxes. From the business point of view, the design is not financially viable if solar dryer will be solely used for chili drying (NPV<0). * IRR, in this case, cannot be calculated.

Table 4. Sources of financing (in US$) Particulars Year 1 2 3 4 5 Community assistance 100 0 0 0 0 National public contribution (e.g. government)

National private capital (e.g. loans, grants)

1700 0 0 0 0

Other resources Total financial resources 1800 0 0 0 0

Table 5. Sustainability (in US$) Particulars Year 1 2 3 4 5 Total financial resources 1800 0 0 0 0 Total operating revenues 0 8856 8856 8856 8856 Total inflows (G) 1800 8856 8856 8856 8856 Total operating costs 0 -17089 -17089 -17089 -17089 Total investment costs -1800 0 0 0 0 Interest payments Loan reimbursement Taxes Total outflows (H) -1800 -17089 -17089 -17089 -17089 Net cash flow (G) – (H) 0 -8233 -8233 -8233 -8233 Cumulated net cash flow (Sn + Cn-1) 0 -8233 -16466 -24699 -32932

Note: Financial sustainability is verified if the cumulated net cash flow row is >0 for all the years considered. The cumulated net cash is obtained by algebraically adding the balance of the current year to the cash of the previous year (Sn + Cn-1 where Sn is the balance of year n and Cn-1 is the cash generated at year n-1). This table includes other outflows like interest payments, loan reimbursement and taxes.


Table 6. Financial return on capital (in US$) Particulars Year 1 2 3 4 5 Total operating revenues 0 8856 8856 8856 8856 Residual value 0 340 Total revenues 0 8856 8856 8856 9196 Total operating costs 0 -17089 -17089 -17089 -17089 National private contribution -1700 Interest payments Loan reimbursement Taxes Total expenditures -1700 -17089 -17089 -17089 -17089 Net cash flow -1700 -8233 -8233 -8233 -7893 Financial internal rate of return (FRR/C) @10% discount rate *

#NUM!

Financial net present value (FNPV/C) ($25,059.34)

Note: The estimation of FIRR on capital includes outflows like the national public and private capital when it is paid up, loan reimbursements, operating costs and related interest, with revenues as inflows. Grants are not included in the analysis. *In this case, IRR cannot be calculated.


Table 7. Sensitivity analysis

Scenario Summary Current Values

Wholesale price

Drying time

Discount rate

Useful lifetime

Thermal efficiency

Market price of collector

Changing Cells: 20% -20% 50% -50% 50% -50% 50% -50% 50% -50% 50% -60% Wholesale price 5.74 6.89 4.59 5.74 5.74 5.74 5.74 5.74 5.74 5.74 5.74 5.74 5.74 Drying time 7.00 7.00 7.00 10.50 3.50 7.00 7.00 7.00 7.00 7.00 7.00 7.00 7.00 Discount rate 0.10 0.10 0.10 0.10 0.10 0.15 0.05 0.10 0.10 0.10 0.10 0.10 0.10 Useful lifetime 5.00 5.00 5.00 5.00 5.00 5.00 5.00 7.50 2.50 5.00 5.00 5.00 5.00 Thermal efficiency 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.45 0.15 0.30 0.30 Market price of collector 567.00

567.00 567.00 567.00 567.00 567.00 567.00 567.00 567.00 567.00 567.00 850.50 226.80

Result Cells:

NPV, d=10% (25,348)

(20,244)

(30,452)

(18,023)

(47,323)

(26,197)

(24,065)

(44,716)

(14,619)

(10,562)

(69,707)

(47,528)

1,267

IRR #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! #NUM! *42.34%

Notes: Current Values column represents values of changing cells at time Scenario Summary Report was created. Changing cells for each scenario are highlighted in gray. *Among the variables, market price of collector/aperture area has the most significant effect on NPV & IRR. The choice of low-cost solar dryer entirely affects financial viability of operation. #NUM = IRR cannot be calculated.

EXERCISE: Perform financial analysis for the example given below5

A company is thinking of purchasing a solar dryer to minimize quality loss. The solar dryer costs $1,000. It will last 10 years and will have an operating cost of $50 in the first year, and increases by $50 in the subsequent years. The expected annual income is $400. After 10 years, the company expects to get $100 for the salvage value, or 10% of its initial cost. If the company’s minimal rate of return is 10%, should it invest in this project?

5 Another way to conduct financial analysis is using a program called OMIE (Operations Management/Industrial Engineering) which can be downloaded online. The highlighted values are the cells that can be changed based on the example provided. For further information, visit http://www.me.utexas.edu/~jensen/ORMM/omie/computation/unit/econ_add/index.html.


Project Definition Periods Rates (%) Worth($)

Name Example Life (yrs) 10 MARR(/yr) 10.% Present (Life) 44.59

Repetitions 1 Uniform (Life) 7.26

Study Period 10 Present (SP) 44.59

IRR 11.87%

Net Investment

Investment Data - Amounts Negative for Investments

Index Description Amount($) Type Start End Salvage Factor Fin. NPW($)

1 Inv. 1 (1000) Investment 0 10 10.% 0.9614 (961.45)

Cash Flow Data - Amounts Negative for Expenditures and Positive for Revenues

Index Description Amount($) Type Start End Parameter Factor CF. NPW($)

1 Revenue 400 Uniform 1 10 1 6.1446 2457.83

2 Op. Cost (50) Uniform 1 10 1 6.1446 (307.23)

3 Cost Inc./Yr (50) Gradient 2 10 1 22.8913 (1144.57)

Definition of terms:

NAME Name of the postharvest technology/project OP. COST Operations and maintenance cost

LIFE Life span of the postharvest technology/equipment COST INC/YR Cost increase per year

MARR Minimum acceptable rate of return SCRAP Salvage or scrap value of the postharvest technology

INV. 1 Amount of investment in Year 0.

REVENUE Expected revenue of the postharvest technology/equipment annually


Fin NPW ($961.45) is the present worth of the investment considering both the initial cost of investment and the salvage value.

CF NPW shows the present worth of the annual cash flow components (revenue, operating cost and cost increase/year).

The Present (Life) equal to $44.59 is the net present worth of the project over its life.

Uniform (Life) equal to $7.26 is net annual worth of the project. Present (SP) is the present worth over the study period. The study

period is the same as the life, hence similar value with present value of the life.

Projected cash flow of the solar dryer example.

Cash Flow Example Simple Investment Payback(yr): 3.5 MARR(/Yr) 10.% Min. Per. 0 NPW 44.59 IRR Guess 10.% IRR(/Yr) 11.87% Cash Flow Period Cash Flow Cum. Val. 0 (1000.00) (1000.00) 1 350.00 (650.00) 2 300.00 (350.00) 3 250.00 (100.00) 4 200.00 100.00 5 150.00 250.00 6 100.00 350.00 7 50.00 400.00 8 0.00 400.00 9 (50.00) 350.00 10 0.00 350.00

Payback: 3.5 years. It means that for a simple investment, it will

take 3.5 years for the total revenues to equal the total investment. Minimum Period (Min Per): 0. Some projects may start at negative

times to indicate advance preparation relative to some arbitrary reference point (time 0). If the project has the first cash flow at some time other than 0, this number will appear here.


NPW(0): US$44.59 This is the net present worth of the cash flow at time 0. Since the value is positive, the investment returns more than 10% the MARR and should be acceptable to the decisionmaker.

IRR Guess: 10%. This is the number that you guess is close to the IRR.

IRR: 11.87%. This is the internal rate of return of the cash flow. The fact that it is greater than MARR 10% means that the project is

acceptable.


Workshop Presentations

Economic Analysis of Selected Postharvest Technologies for Tomato and Cabbage in

Cambodia

Borarin Buntong1, Mong Vanndy2 and Antonio Acedo Jr.3 1Faculty of Agro-Industry, Royal University of Agriculture, Phnom Penh,

Cambodia; 2Kbal Koh Agricultural Research Center, Phnom Penh, Cambodia; 3AVRDC – The World Vegetable Center, Postharvest Project Office,

Vientiane, Lao PDR

Introduction The AVRDC-ADB postharvest projects in Cambodia pursued postharvest technology development covering fresh produce handling and processing for tomato and chili under RETA 6208 and for common cabbage and Chinese kale under RETA 6376. From the different R&D activities, promising technologies were identified (Table 1). In this workshop, three technologies were subjected to economic analysis: modified atmosphere packaging and evaporative cooling storage of tomato variety CLN1462A; and cabbage soft rot control using lime paste.

Selected Technologies Modified Atmosphere Packaging Modified atmosphere packaging (MAP) maintains quality and extends shelf life of fresh produce by creating low oxygen, high carbon dioxide atmosphere, which inhibits physiological processes such as respiration and ripening; and by maintaining a humid atmosphere, which slows water loss, the major cause of weight loss of produce. The simple technique developed involves sealing tomato at the mature-green to breaker stage in commercially available 25 micron-thick low-density polyethylene plastic bags. (Other film types are less effective; thicker films favor decay.) Tomatoes were held in MAP for 10 days to simulate prolonged transport or temporary storage prior to marketing. For tomato variety CLN1462A, MAP reduced weight loss to 1-2%. Fruit in the open (control) had a weight loss of 20-23% (Table 1). Ripening also was inhibited. With MAP, shelf life was extended to about 6-9 days more than that of the control.

Evaporative Coolers Two types of simple evaporative coolers (EC) were developed: a brick-walled cooler with moist sawdust as wall insulation, and a box-type cooler, which is covered with a wet jute sack. These ECs had slightly lower temperatures but much higher relative humidity than ambient conditions. Using the brick-walled EC, mature-green to breaker CLN1462A tomato had much lower weight loss


(1.5%) than that at ambient (23%) (Table 1). Shelf life also increased by 3-6 days.

Lime Paste Bacterial soft rot caused by Erwinia carotovora pv. carotovora, which causes soft mushy lesions with a foul smell, is the number one postharvest problem of cabbages and other Brassica vegetables. It usually starts at the cut butt end of the cabbage head. Lime, alum, and guava leaf extract, which are cheap and available in rural areas, were tested as potential control agents. Lime paste was prepared by mixing lime powder and water at a 1:1 ratio. Alum was prepared as a 15% solution (15 g alum granules in 100 mL water), and guava leaf extract was made by chopping mature leaves into small pieces and pounding the pieces in a mortar and pestle with water equivalent to the weight of the leaves (1:1 ratio). The treatments were applied at the cut butt end of the cabbage head using appropriate tools (e.g. for lime paste, small bamboo stick with a flattened tip; for alum or guava leaf extract, a cotton cloth dipped in the solution). After treatment, crude soft rot inoculum was applied to the butt ends. All three treatments were effective in reducing soft rot, with lime and guava leaf extract as the most promising. Only about 9 percent of cabbage butt ends needed trimming when treated with lime paste. With the control treatment (water), 44 percent of cabbage ends required trimming due to the disease (Table 1).

Economic Analysis Based on partial budget analysis, the three treatments showed positive net change, indicating that they are profitable (Tables 2-4). For tomato MAP, the saving from weight loss reduction is more than sufficient to recover the cost of the technique (Table 2). For tomato ECs, the investment cost of the EC structure ($700) could be recovered in less than one year, as the first year of operation could realize a net income of more than three times the investment (Table 3). The analysis for cabbage soft rot control with lime paste is shown in Table 4. If improved marketability and shelf life, reduced labor for trimming, and reduced waste disposal are factored in, the economic benefits of this treatment would further increase.

Conclusion Tomato MAP and ECs, and cabbage soft rot control using lime paste, are highly profitable, effective, and low-cost postharvest technologies.

Acknowledgement Financial support from Asian Development Bank is gratefully acknowledged.


Table 1. Postharvest technology (PHT) developed for tomato and chili (RETA 6208) and cabbage and Chinese kale (RETA 6376) in Cambodia Vegetable/Postharvest Technology

PHT specifications Benefits (over usual practice/condition as control)

Tomato

Modified atmosphere packaging (MAP)

25 micron-thick low-density polyethylene (LDPE) plastic bag; fruit at mature green to breaker stage at harvest and held for 10 days simulating prolonged transport or holding

Reduced weight loss (WL): WL in MAP at end of shelf life of control- CLN1462A (AVRDC var): 1-2% (control: 20-23%) TLCV15 (AVRDC var): 6% (control: 16%) T56 (local var): 4% (control: 25%) TMK1 (local var): 5.5% (control: 18%) Delayed ripening: 3-6 days (all var) Improved shelf life: 6-9d (all var)

Evaporative cooling storage (ECS) Brick-walled evaporative cooler (BrEC) or box-type EC (BoEC); fruit at mature green to breaker stage at harvest

Reduced WL: WL at end of shelf life of control- CLN1462A: BrEC-1.5%, BoEC-4% (control: 23%) TLCV15: BrEC-2.5%, BoEC-8% (control: 16%) T56: BrEC-1.5%, BoEC-9.5% (control: 25%) TMK1: BrEC-1.5%, BoEC-5% (control: 24%) Improved shelf life: 3-6d (all var)

Bicarbonate solution for decay control

2% solution (20 g food-grade baking soda in 1 liter water); fruit dip for 2 min, and rinse with clean water (rinsing necessary to avoid white residues on fruit surface)

Reduced decay during storage in BrEC: CLN1462A:14% (control: 18%) TLCV15: 4% (control: 37%) T56: 9% (control: 27%) TMK1: 0% (control: 15%)

Paste processing Method of Royal Univ. of Agriculture (RUA) adapted; different varieties used

T56 paste-best quality CLN1462A/TLCV15 paste-more stable storage quality Fruit for paste processing should be deep red in color.

Chili

MAP 25 micron-thick polypropylene (PP) plastic bag; fruit at full red stage with (+) or without (-) pedicel (fruit stalk)

Reduced WL: WL in MAP at end of shelf life of control (3d)- 9955-15 (AVRDC var): 0% (+), 0.5% (-) Control: 12.5% (+), 14% (-) CCA321 (AVRDC var): 0% (+), 1.0% (-) Control: 12% (+), 16.5% (-) CCK5 (local var): 0% (+), 0% (-) Control: 14% (+), 12.5% (-) Improved shelf life: 3d (all var)


ECS BrEC; fruit at full red stage with (+) or without (-) pedicel (fruit stalk)

Reduced WL: WL in MAP at end of shelf life of control (3d)- 9955-15: MAP-8.5% (+), 5% (-) Control-12.5% (+), 14% (-) CCA32: MAP-3.5% (+), 7% (-) Control-12% (+), 16.5% (-) CCK5: MAP-5% (+), 2.5% (-) Control: 14% (+), 12.5% (-) Improved shelf life: 3d (all var)

Solar dryer RUA solar dryer (RSD) and cabinet solar dryer (CSD); full red fruit of 9955-15, CCA321 and local variety

Reduced moisture content to <10% in 3d (sun drying-6d) Weight of dried fruit higher than sundried fruit More hygienic than sun-drying

Cabbage

Bacterial soft rot control

Lime paste prepared as 1:1 lime powder and water mixture, 15% alum solution (15 g alum granules in 100 ml water, and guava leaf extract as 1:1 pure extract and water mixture; applied at butt end of cabbage

Reduced trimming loss due to soft rot: Trim loss after 4d: Control (water): 44.3% Lime paste: 8.7% Alum solution: 20.3% Guava leaf extract: 7.2%

MAP 25 micron-thick LDPE plastic bag Reduced WL: MAP-4.5%; control-19% (after 8d storage) Improved shelf life

ECS BrEC Reduced WL: EC-5.5%; control-19% (after 8d storage) Improved shelf life

Solar dryer RSD and CSD; leaves chopped into small slices, placed in 5% salt solution overnight, and then spread thinly on drying trays

Reduced moisture content to <10% in 1d (sun drying in 2-3d) More hygienic than sun drying

Fermentation FAVRI method Long shelf life but color and taste of product from the traditional method more preferred

Chinese kale

MAP 25 micron-thick polypropylene (PP) plastic bag Reduced WL: MAP-1%; control-37.5% (after 2d storage) Improved shelf life (control lasted for <1d due to rapid wilting)

ECS BrEC and BoEC Reduced WL: BrEC-3.5%; BoEC-7%; control-23% (after 2d storage) Improved shelf life


Table 2. Partial budget analysis for using MAP with CLN1462A tomato (per 1000 kg fruit)

COSTS Qty Price Value BENEFITS Qty Price Value (A) Added Costs ($) (C) Reduced Costs ($)

Plastic bags, 10 kg capacity 100 0.025 2.5 0 Labor in packing 2 5 10 Sub-total 12.5 Sub-total 0 (B) Reduced Return ($) (D) Added Return ($) 0 Saving-WL reduction 180 0.5 90 Saving-SL extension 500 0.5 250

Sub-total 0 Sub-total 340

Total 12.5 Total 340

Estimated net change 327.50

Results/Assumptions Unit Qty

Weight loss after 6 days storage

MAP % 2

Control % 20

WL reduction % 18

Savings from WL reduction/1000 kg kg 180 Saving from shelf life (SL) extension (assumed at 50%) kg 500


Table 3. Partial budget analysis for using brick-walled evaporative cooler for CLN1462A tomato (1000 kg fruit) per year COSTS Qty Price Value BENEFITS Qty Price Value


ECS depreciation 1 100 100 0 Labor (1md/1000kg/10d) 10 5 50 Water consumption (4 m3/yr) 4 0.5 2

Sub-total 152 Sub-total 0 (B) Reduced Return ($) (D) Added Return ($) 0 Saving-WL reduction 2150 0.5 1075 Saving-SL extension 3000 0.5 1500



Estimated net change 2,423.00

Net change per batch 242.30


Cost of EC $ 700

Storage capacity kg 1000

Number of use per year time 10 WL reduction % 21.5

Lifespan of EC year 7 Saving from WL reduction/batch kg 215

Weight loss (WL) after 6 days storage Saving from WL reduction/year kg 2150

ECS % 1.5

Ambient % 23 Saving from shelf life (SL) extension (assumed at 30%)/batch kg 300

Saving from shelf life (SL) extension (assumed at 30%)/year kg 3000


Table 4. Partial budget analysis for using lime paste to control bacterial soft rot control in cabbage (per 1000 kg)


Lime powder, kg 1 1 1 0 Labor in applying lime 5 5 25 Sub-total 26 Sub-total 0 (B) Reduced Return ($) (D) Added Return ($) 0 Saving from trimming 350 0.5 350


Total 26 Total 350



Trimming loss due to soft rot

Water (control) % 44

Lime paste % 9

Trimming loss reduction % 35

Saving in weight /1000 kg kg 350


Economic Analysis of Precooling and Cold Storage of Chinese Kale in Cambodia

Sambath Sonnthida, Som Bunna, Pann Visal, Houn Sereyvuth,

Srey Sinath, and Suzie Newman Cambodia Agricultural Research and Development Institute

Phnom Penh, Cambodia

Introduction Vegetables in Cambodia are in short supply due primarily to low levels of production and postharvest losses. Postharvest losses are estimated at 20-30%, caused by excessive field heat, high water loss, and physical damage during handling. Chinese kale is a popular leafy vegetable available throughout the year. Current postharvest practices involve harvesting during the hot period of the day, leaving the produce in the field to wilt to avoid breakage and assist packing, and loading 200-300 kg of kale into baskets with little or no ventilation. To dissipate field heat, reduce weight loss, and extend shelf life of Chinese kale, hydrocooling and cool storage were investigated. Hydrocooling and cool storage are two postharvest technologies that offer the potential to reduce postharvest losses of Chinese kale if the technology could be adapted to Cambodian conditions. The economic benefits need to be clearly demonstrated before farmers, collectors and wholesalers will adopt these technologies. Partial budget analysis is one economic tool to analyze the cost and benefit of a technology; it shows the profit from using a technology by determining how much additional money is spent on the technology (added cost) and how much additional return (added return) is provided by the technology. In this paper we compare Cambodian farmers’ traditional practice with improved postharvest practices involving hydrocooling and cold storage of Chinese kale.

The Technology In developing the technology, experimental trials were conducted comparing the standard field practice with three improved handling regimes:

Traditional practice – Kale harvested early morning, left in the sun to wilt slightly before packing, trimmed and packed into ice boxes with banana leaves and ice. Direct refrigerated storage – Kale harvested early morning, trimmed, placed in perforated plastic bags, and placed in 4ºC cold storage.


Hydrocooling followed by storage in an ice box – Kale harvested early morning, trimmed, immersed in ice water and packed into ice boxes with banana leaves and ice. Hydrocooling followed by refrigerated storage – Kale harvested early morning, trimmed, immersed in ice water, air-dried, placed in perforated plastic bags, and placed in 4ºC cold storage.

Table 1 shows that hydrocooling followed by refrigerated storage reduced weight loss to 2.8% after three days of storage, whereas the traditional practice had a much higher weight loss of 13.2%. It was also the most effective treatment in extending shelf life to more than twice that of the traditional practice. The other two handling regimes (refrigerated storage or hydrocooling alone) were ineffective in reducing weight loss and prolonging shelf life. It has been reported previously that under optimum storage conditions of 0ºC with 95-98% relative humidity, leafy vegetables could be stored for up to two weeks (Hardenburg et al., 1986; Saslow and Cantwell, 1999). To achieve this, field heat must be removed from the produce as quickly as possible after harvest by precooling, such as with hydrocooling, hydrovacuum cooling, liquid icing, package icing, or top icing (James, 2004). Table 1. Shelf life and weight loss after 3 days storage of Chinese kale under different handling regimes

Handling Regime Shelf Life (day) Weight Loss (%)

Traditional practice 2.5 13.2

Direct refrigerated storage (4ºC) 3.3 16.6

Hydrocooling followed by storage in an ice box 2.3 16.6

Hydrocooling followed by refrigerated storage (4ºC) 6.0 2.8

Economic Analysis To assess the economic potential of hydrocooling and cold storage relative to the traditional practice, the costs and benefits of each were analyzed using partial budgeting. Hydrocooling followed by refrigerated storage reduced weight loss by about 11% and increased shelf life by 3.5 days compared with the traditional practice. Table 2 shows that the total added cost to set up this technology was $325.10 while the total added return was $810.00, providing a net profit of $ 484.90, which clearly indicates the technology is economically feasible.


Table 2. Partial budget analysis of hydrocooling plus cold storage of Chinese kale (1000 kg)

COSTS Qty Price Value BENEFITS Qty Price Value (A) Added Costs ($) (C) Reduced Costs

($) (none)

Variable Cost

- Ice (50 kg/1.5 pcs of ice)

30 2.50 75.00

- Big plastic to do pre-cooling

40 0.10 4.00

- Fuel for pumping water (L)

4 1.50 6.00

- Perforated plastic (2 kg/bag)

500 0.025 12.50

- Electricity (kw/h) 288 0.20 57.60

- Labor (day/ton) 2 5.00 10.00

Fixed Cost

- Depreciation of refrigerators (5year of 1000 $)

4 40.00 160.00

Sub Total 325.10 Sub Total 0

(B) Reduced Return ($) (none) (D) Added Return ($)

- Weight loss reduction

110.00 1.00 110.00

- Saving from increased shelf life

700.00 1.00 700.00

Sub Total 0 Sub Total 810.00

Total 325.10 Total 810.00


Conclusion Hydrocooling Chinese kale followed by refrigerated storage at 4 ºC extended the shelf life by 3.5 days and reduced weight loss by a further 11.0%. This technology provided a profit of about $485 per tonne of produce.

Acknowledgement Financial support for this project was provided by the Australian Centre for International Agricultural Research HORT/2003/045 (ACIAR-06).


References Hardenburg, R.E., Watada, A.E. and Wang, C.Y. 1986. The commercial storage of fruits,

vegetables, and florist and nursery stocks. USDA Handbook No. 66. pp. 12 and 59. James, W.R. 2004. Green for cooking, the commercial storage of fruits, vegetables, and

florist and nursery stocks. Update USDA Handbook No. 66. Suslow, T.V. and Cantwell, M. 1999. Spinach, recommendations for maintaining

postharvest quality. Produce Facts, University of California, Davis CA. http://postharvest.ucdavis.edu/produce/producefacts/veg/spinach


Economic Analysis of Vacuum Cooling of Iceberg Lettuce in Yunnan, China

Li Hong and Chen ZongQi

Yunnan Academy of Agricultural Sciences, Kunming, Yunnan, China

Introduction Iceberg lettuce or crisphead lettuce (Lactuca sativa var. capitata) is a cool season leafy vegetable that forms a tight, crisp, white to light green head. It is usually eaten raw as a salad. In China, it is also eaten cooked; stems as well as leaves are consumed. In Yunnan, China, iceberg lettuce is one of the major leafy vegetables produced for domestic and export markets. A major production challenge is the high perishability of the harvested produce. The midribs often break during harvesting and field packing, further accelerating quality loss due to increased browning and susceptibility to decay. The produce is extremely sensitive to ethylene, which may come from smoke of forklifts or transport vehicles and from high ethylene-generating produce, such as ripening fruit. Ethylene induces russet spotting, a disorder characterized as dark brown spots especially on the midribs and in severe cases, on the leaves and throughout the head. The produce should be cooled as soon as possible after harvest. As the first measure in low temperature management, precooling to rapidly remove field heat from the produce is vital. This paper describes the technical and economic benefits of vacuum cooling technology developed for iceberg lettuce in Yunnan, China.

The Technology Compact heads of iceberg lettuce (very loose heads are immature and very hard head are over-mature) are harvested, sorted, and trimmed to 4-5 wrapper leaves, prepacked in plastic bags with holes, and packed in carton boxes. The packed produce is then placed in a vacuum cooler for 30-45 min (longer cooling in summer) to bring down the internal head temperature to 1-4 °C. The produce is then stored at 0-2 °C in cold rooms or loaded to refrigerated trucks for transport to destination markets. Vacuum cooling could greatly improve lettuce quality and increase shelf life by two- to four-fold longer than without vacuum cooling.


Economic Analysis Partial budget analysis of vacuum cooling was performed based on the following cost and return items: Costs:

Equipment cost (vacuum cooler): $35,000 Equipment useful life: 15 years Equipment annual depreciation: $2,333 Volume of produce cooled per month: 10 tonnes Equipment monthly depreciation: $195 Transport cost: $0.1/kg

Returns: Shortened cooling time: $140 Increased shelf life and improved quality: 70% Table 1 shows the results of the analysis per 10 tonnes produce. The financial returns from vacuum cooling are much higher than the cost of the treatment, indicating that the technique is highly profitable. At present, adoption of the technology is limited to large exporting companies due to the cost of investment. Technology use by small producers and marketers would depend on the availability of physical and technical support and market assurance. Table 1. Partial budget analysis of vacuum cooling of iceberg lettuce (per 10 tons).

COSTS Qty Price Value BENEFITS Qty Price Value (A) Added Costs ($) (C) Reduced

Costs ($)

Vacuum cooler (depreciation)

195 Shortened cooling time

140

Transport cost 10000 0.1 1000 Sub-total 1195 Sub-total 140 (B) Reduced Return ($)


0 Increased shelf life and improved quality

10000 0.7 7000



Estimated net change 5,945

Conclusion Vacuum cooling rapidly cools produce to the desired low temperature in transit and storage. This helps to retard the rapid deterioration in quality and enables prolonged storage. The technique also proved to be economically feasible.


Economic Analysis of Selected Postharvest Technologies for Tomato and Chili in Lao PDR

Thongsavath Chanthasombath1, Chansamon Phomachan1 and Antonio Acedo Jr.2

1Clean Agriculture Development Center, Department of Agriculture, Vientiane, Lao PDR

2AVRDC – The World Vegetable Center, Postharvest Project Office, Vientiane Lao PDR

Introduction Through the AVRDC-ADB postharvest R&D programs, the Lao PDR team developed a number of postharvest technologies (PHT) for tomato and chili (RETA 6208) and for cabbage, Chinese or green mustard and aromatic mustard (RETA 6376). These PHT include both fresh produce handling and processing techniques and the promising treatments and technical benefits are presented in Table 1. To assess their economic viability, these PHT will be subjected to cost-benefit analysis using appropriate methodology. Three PHT are sampled for economic analysis in this workshop: modified atmosphere packaging (MAP) and evaporative cooling storage (ECS) of breaker tomato variety TLCV15, and chili solar drying.

Selected Technologies Tomato ECS A simple evaporative cooler (EC) was developed with a double wall made of clay bricks interspersed with sand kept moist with water. The removable topmost cover is made of jute sacking on a wooden frame, and the jute sack is also moistened with water. During storage of breaker tomato variety TLCV15, weight loss (5%) was lower than that at ambient (13%) (Table 1). Shelf life was also prolonged by an average of three to six days.

Tomato MAP Plastic bags made of 25-micron thick high-density polyethylene were identified as the most promising MAP film for tomato. The fruit is placed inside the bag, which is then sealed with a rubber bond. MAP holding period was 10 days to simulate prolonged transport or temporary storage. It kept weight loss to less than 1% in contrast to that of fruit held in the open, which lost 16% for the same storage period (Table 1). Shelf life was prolonged by an average of nine days.


Solar dryer for chili drying The design of the solar dryer from the National University of Lao PDR (NUL)-Faculty of Engineering was adapted and scaled up. During drying, much higher temperatures and lower RH than under sun drying conditions were maintained. The solar dryer shortened the drying period of chili regardless of variety (Table 1). The dried chili should also be more hygienic, as the produce is not exposed to dust and stray animals as it dries.

Economic Analysis Partial budget analysis was performed for tomato ECS and MAP, both showing positive net change illustrating the profitability of the techniques (Tables 2-3). In both cases also, the financial return from weight loss reduction was more than enough to recover the cost of the techniques. Comparing the two techniques, MAP appeared to be more profitable than ECS. However, these techniques have different uses as MAP was designed to minimize postharvest loss particularly during transport while ECS as a low-cost storage facility particularly in rural areas where cold storage facilities are not available. On the other hand, financial analysis of the solar dryer for chili drying showed that the technological venture is not profitable, as the cost of production exceeds the revenues from sales of the dried product and NPV is negative (Tables 4-6). This result suggests the need to maximize the use of the solar dryer, such as increasing product volume capacity, increasing the number of times it is used for drying, and using it to dry other commodities.

Conclusion Tomato MAP and ECS are highly profitable apparently because of their low input requirements and high technical effectiveness. In the case of the solar dryer for chili drying, the negative financial position despite promising technical viability underscores the need to re-examine the utility of the technique.

Acknowledgement The financial support from Asian Development Bank is gratefully acknowledged.


Table 1. PHT developed for tomato and chili (RETA 6208) and cabbage, Chinese/green mustard and aromatic mustard (RETA 6376) in Lao PDR

Vegetable/PHT PHT specifications Benefits (over usual practice/condition as control)

Tomato Modified atmosphere packaging (MAP)

25 micron-thick high-density polyethylene (HDPE) plastic bag; fruit at breaker and turning-pink stage at harvest and held for 10 days simulatingprolonged transport or holding, except breaker fruit of SR382 (6d MAP holding)

Reduced weight loss (WL): Breaker fruit: CLN1462A (AVRDC var): <1% (control: 12%) TLCV15 (AVRDC var): <1% (control: 16%) SR382 (local var): <1% (control: 5.5%) Turning fruit: CLN1462A (AVRDC var): <1% (control: 6%) TLCV15 (AVRDC var): 1.5% (control: 14%) SR382 (local var): <1% (control: 7.5%) Delayed ripening and improved shelf life: Breaker fruit: CLN1462A (AVRDC var): 15d (control: 9d) TLCV15 (AVRDC var): 21d (control: 12d) SR382 (local var): >12d (control: 9d) Turning fruit: CLN1462A (AVRDC var): 6d (control: 6d) TLCV15 (AVRDC var): 18d (control: 12d) SR382 (local var): 21d (control:3d)

Evaporative cooling storage (ECS)

Brick-walled evaporative cooler (EC) with moist sand insulation

Reduced WL: Breaker fruit: CLN1462A: EC-7%; control-16% TLCV15:EC-5%; control-13% Turning fruit: CLN1462A: EC-5.5%; control-14% TLCV15: EC-5%; control-8% SR382: EC-3%; control-11% Improved shelf life: Breaker fruit: CLN1462A: EC-15d; control-9d TLCV15: EC-18d; control-12d Turning fruit: CLN1462A: EC-9d; control-6d TLCV15: EC-15d; control-12d SR382: EC-20d; control-3d

Paste, puree and juice processing

Method of National Univ. of Lao PDR (NUL) adapted

Paste, puree and juice from red tomato of AVRDC var were still highly acceptable after 3 months’ storage in chiller.

Chili MAP 25 micron-thick low-density poly-

ethylene (LDPE) or polypropylene (PP) plastic bag; fruit at full red stage

Reduced WL: (WL after 6d) CCA321 (AVRDC var): MAP-<1%; control-8.5% CCA323 (AVRDC var): MAP-0.5-4%; control-14% PBC142 (AVRDC var): MAP-8-11%; control-20% Local var (C. frutescens): MAP-<1%; control-30% MAP also reduced WL of fruit at green and turning stage at harvest but inhibited reddening.

ECS EC; fruit at full red stage Reduced WL: 4-8% more weight after 3d and 20-30% after 8d storage relative to control (all var) EC also increased full reddening of fruit at turning stage at harvest, particularly CCA321 and CCA323

Solar dryer NUL solar dryer adapted; temperature at midday about 70oC and later afternoon, >40-50oC; full red fruit

Reduced moisture content to <10% in shorter period than sun drying (sun) CCA321: 2d (sun-12d); CCA323: 6d (sun-12d); PBC142: 1d (sun-6d); Demon F1: 6d (sun-8d); Local var: 2d (sun-6d) More hygienic than sun drying

Cabbage Bacterial soft rot control Lime paste prepared as 1:1 lime

powder and water mixture, 15% alum solution (15 g alum granules in 100 ml water, and guava leaf extract as 1:1 pure extract and water mixture; applied at butt end of cabbage

Reduced trimming loss due to soft rot: (trim loss after 4-6d from pathogen inoculation) Lime, alum and leaf extract-treated: 0% Control: 20%

MAP 25 micron-thick low density polyethylene (LDPE) w/ holes

Reduced WL: MAP-<1%; control-22% (after 14d storage)


(4/kg) or HDPE plastic bags Improved shelf life (<50% trim loss due to decay): LDPE+holes-30d HDPE-26d Control-16d (trim loss due to wilting of outer leaves)

ECS EC Reduced WL: EC-11%; control-22% (after 14d storage) Improved shelf life (<50% trim loss- wilting and decay): EC-22d; control-16d

Chinese/green mustard MAP 25 micron-thick HDPE plastic

bags with holes (4/kg) Reduced WL: MAP-5%; control-28% (after 2d storage) Improved shelf life: MAP-3d (trim loss after 2d-8%) Control-1d

ECS EC Reduced WL: EC-15%; control-28% (after 2d storage) Improved shelf life: EC-3d; control-1d

Fermentation FAVRI and NUL methods FAVRI method-longest shelf life; crispy texture NUL method-good color and taste and longer shelf life than traditional method

Aromatic mustard MAP 25 micron-thick LDPE or HDPE

plastic bags Reduced WL: LDPE-4%; HDPE-3%; control-14% (after 2d storage) Improved shelf life: LDPE/HDPE-3d; control-1d

ECS EC Reduced WL: EC-7%; control-14% (after 2d storage) Improved shelf life: EC-3d; control-1d


Table 2. Partial budget analysis of ECS of breaker tomato var. TLCV15 (200 kg/batch) per year


ECS (annual depreciation) 17 0 Labor in packing/storage 1 4 4 0

Plastic crates (annual depreciation)

20


(B) Reduced Return ($) (D) Added Return ($)

0 Saving-WL reduction 64 0.9 57.6

Saving-SL extension 240 0.9 216

Sub-total 0 Sub-total 273.6

Total 41 Total 273.6


Results/Assumptions Unit Qty Unit Qty

Cost of EC per unit $ 200 Plastic crates pcs 10

Lifespan of ECS year 10 Price per unit $ 6 ECS salvage value $ 30 Total cost of plastic crates $ 60 Annual depreciation $ 17 Lifespan of plastic crates year 3 Storage capacity kg 200 Annual depreciation-no salvage value 20 Number of use per year times 4

Weight loss (WL) after 15 days storage

ECS % 5 Ambient % 13 WL reduction % 8 Saving from WL reduction kg 64 (200 kg x 8% x 4 times/year) Saving from long shelf life of 30% kg 240 (200 kg x 30% x 4 times/year)


Table 3. Partial budget analysis of MAP of breaker tomato var. TLCV15 (200 kg/batch) per year COSTS Qty Price Value BENEFITS Qty Price Value


Plastic bag (10 kg cap/pc) 20 0.06 1.2 0

Labor in packing 1 4 4

Sub-total 5.2 Sub-total 0

(B) Reduced Return ($) (D) Added Return ($)

0 Saving-WL reduction 120 0.9 108

Saving-SL extension 240 0.9 216


Total 5.2 Total 324


Results/Assumptions Unit Qty No. of storage per year times 4 Similar to ECS (for comparison) Weight loss (WL) after 12 days storage MAP % 1 Open % 16 WL reduction % 15 Saving from WL reduction kg 120 (200 kg x 15% x 4 times/year) Saving from long shelf life (SL) of 30% kg 240

(200 kg x 30% x 4 times/year)

(Shelf life: MAP-21 days; open-12 days)


Table 4. Input parameters for financial analysis of using NUL solar dryer for chili drying Parameter Unit Value a. Operational factors Mass of solar dried product in a batch kg Msd 60.00 Initial moisture content of the product on wet basis fraction Mci 0.80 Final moisture content of the product on wet basis fraction Mcf 0.10 Harvesting time days harT 48.00 Drying time days dryT 5.00 Drying temperature oC Td 70.00 Ambient temperature oC Ta 30.00

Fraction of the sensible heating requirement of the product on the first day that is required for sensible heating on other days of drying

fraction E 0.50

Latent heat of vaporization of water MJ/kg Hfg 2.26 Daily solar radiation availability MJ/m2 I 5.50

Overall thermal efficiency of the solar dryer fraction Nd 0.20 b. Financial factors Market price of collector per unit aperture area US$/m2 Pc 262.00 Cost of the remaining components of the indirect type solar dryer as

a fraction of the collector cost fraction f 0.10

Annual capacity utilization factor of the dryer fraction CUF 0.13 Annual repair and maintenance cost as a fraction of capital cost fraction m 0.05 Useful lifetime of the dryer year t 15.00 Discount rate fraction d 0.10 Wholesale selling price US$/kg Pw 9.00 Fraction of dried product lost in the traditional open sun drying

process fl 0.30

Increase in the selling price of the product due to improved quality as a fraction of selling price of the product

fq 0.10

Computations:

Unit cost of solar drying of the product (US$/kg) 9.70 Cost of drying ($): 48 harvesting days / 5 drying days * 60kg * $9.70/kg 5,587.2 Cost of raw materials ($): 48 harvesting days / 5 drying days * 60kg * $1.03/kg farm gate price 593.28 Salaries (5% of investment cost) 85.00 Revenue from sales ($): 48 harvesting days / 5 drying days * 10kg * $9/kg wholesale price 864.00


Table 5. Financial analysis of using NUL solar dryer for chili drying Year Capital expenditure Revenue from sales Cost of production Net 0 (1,700) (1,700) 1 864 (6271) (5407) 2 864 (6271) (5407) 3 864 (6271) (5407) 4 864 (6271) (5407) 5 864 (6271) (5407) 6 864 (6271) (5407) 7 864 (6271) (5407) 8 864 (6271) (5407) 9 864 (6271) (5407) 10 864 (6271) (5407) 11 864 (6271) (5407) 12 864 (6271) (5407) 13 864 (6271) (5407) 14 864 (6271) (5407) 15 113 864 (6271) (5294) NPV @ d=10% (31,773) IRR #DIV/0!

#DIV/0! = IRR cannot be calculated.

Table 6. Sensitivity analysis of using NUL solar dryer for chili drying Particulars % Value NPV IRR Decrease in revenue Wholesale price Pw -10% 8.10000 (32,256) #DIV/0! Increase in costs CUF CUF 50% 0.19726 (30,260) #DIV/0! -50% 0.06575 (32,530) #DIV/0! Discount rate d 50% 0.15000 (30,412) #DIV/0! -50% 0.05000 (33,441) #DIV/0! Useful lifetime t 50% 22.50000 (28,632) #DIV/0! -50% 7.50000 (42,864) #DIV/0! Repairs and maintenance (fraction) m 50% 0.07500 (36,083) #DIV/0! -50% 0.02500 (27,463) #DIV/0! Market price of collector Pc 50% 393 (47,406) #DIV/0! -50% 131 (16,140) #DIV/0!

#DIV/0! = IRR cannot be calculated.


Economic Analysis of Chitosan Treatment of Lettuce in Myanmar

Kyaw Nyein Aye

Yangon Technology University, Yangon, Myanmar

Introduction In Myanmar, people consume vegetables as part of the daily diet. The country exports very few vegetables, although some organic produce has entered the value chain. Traditional and commercial postharvest technologies are used to protect vegetables for market sale. Chitosan is a promising organic, safe, and cheap compound that could be used to improve the postharvest life of vegetables. It is a natural polymer of -glucosamine derived from chitin, which can be extracted from crab or shrimp shells. Chitosan has been found to have antimicrobial activity and to elicit plant defense systems such as chitinase, which destroys cell walls of pathogens; phytoalexin, which is toxic to bacteria and fungi; and proteinase inhibitor (Robert, 1989; Thazin, 2006). Coating fruit and vegetables with chitosan could minimize decay incidence after harvest. In a packinghouse operated by the Yangon City Development Committee, lettuce is precooled in cold water to which a disinfectant has been added, then packed. Chitosan could be used in place of the disinfectant.

The Technology When lettuce arrives at the packinghouse, damaged leaves are trimmed and the lettuce is sorted. The produce is then hydrocooled in a tunnel chamber with conveyor belt by 1°C water spray for about 5 min. A disinfectant, usually 0.1% chlorine or hydrogen peroxide, is added to the cooling water. Chitosan at 0.005-0.01% is added to the cold water in place of the disinfectant. It increases shelf life by 30-50%, reduces decay comparable to that of the chemical disinfectant, does not cause any bad smell, and is safe for human health and the environment. After hydrocooling and chitosan treatment, the produce is dried with a blow dryer. It is then packed in plastic bags and placed in cartons for cold storage or transport in refrigerated vans to air cargo terminals for export.


Economic Analysis Table 1 gives the cost and return analysis of chitosan compared with the disinfectant. As profitability indicators, net income, return on investment (ROI) and net profit margin were calculated. These three indicators were higher for chitosan, which means using chitosan is more profitable than the disinfectant. This is mainly due to the lower cost of chitosan compared with the disinfectant. Table 1. Financial analysis of chitosan treatment as compared with using the usual disinfectant during hydrocooling of lettuce (per kg) Particulars With Disinfectant ($) With Chitosan ($) Total income (TI) 5.00 5.00 Costs: Fixed cost 0.01 0.01 Variable costs Lettuce 3.00 3.00 Disinfectant or chitosan 0.99 0.49 Electricity 0.10 0.10 Labor 0.20 0.40 Total cost 4.30 4.00 Net income (NI) 0.70 1.00 ROI 16.28% 25% Net profit margin (NI/TI) 14% 20%

Conclusion Chitosan is a biocompatible and biodegradable compound that can be used as a natural additive in horticulture, particularly in improving postharvest life of vegetables. It proved to be economically feasible and could replace existing disinfectants hazardous to human health and the environment.

Acknowledgement The author would like to thank AVRDC-ADB RETA 6376 project for providing travel support to participate in the GMS Workshop on Economic Analysis of Postharvest Technologies for Vegetables. Gratitude is also extended to Yangon Technological University and Myanmar Fruit and Vegetable Producers and Exporters Association for the support for research activities in postharvest technology of vegetables.

References Robert, L. E. 1989. Salts of chitin derivatives. PCT Appl. Wo. 8907395. Thazin, H. 2006. Production of chitosan from various sources for use as a plant growth

stimulant and study on the antifungal chitinase activity of Trichoderma harzianum as a biocontrol agent. Yangon Technological University, Myanmar: Ph.D. Thesis.


Economic Analysis of Melon Cold Storage and Onion Drying in Myanmar

Cho Cho Myint

Kaung Myanmar Aung Agriculture Co., Ltd., Yangon, Myanmar

Introduction Muskmelon (Cucurbit melo) and onion (Allium cepa) are major vegetable crops in Myanmar. Muskmelon has become popular due to the high production income and great potential for export. However, cost of production is high. Selling fruit in domestic markets usually generates lower profit than in export markets. Export marketing requires fruit quality to be maintained for at least 3-4 weeks and this could be achieved by cold storage. Onion is a popular spice vegetable constantly demanded by consumers year- round. Among vegetables, onion production ranks second to tomato. Of the world’s total onion production of 52 million MT, Asia produced 33 million MT, with Myanmar contributing 583,500 MT from an area of 55,600 hectares (FAOSTAT, 2001). Growing period is usually during rainy and winter seasons and the bulbs are stored for a maximum of 8-9 months by farmers for their own consumption, and by commercial farmers and wholesalers for sale at domestic and foreign markets. However, storage losses of more than 40% are common due to sprouting, rotting, and dehydration. Market prices also fluctuate greatly; during peak production when supply exceeds demand, price drops. Cold storage could minimize the problem but the high cost and requirement for electricity and skilled labor make it unsuitable for resource-poor farmers. Dehydration technology could offer a simple, low-cost and profitable alternative.

The Technologies Melon cold storage Prior to cold storage, a series of packinghouse/pre-storage operations are undertaken. Fruits are washed with chlorinated water and then treated in 52°C water for 1-2 minutes as disinfectant treatment followed by drying in a blow dryer. Fruit are further checked for quality, size-graded, and packed into carton boxes (Fig.1). This is followed by precooling using forced-air cooler at 3 °C for 12 hours before cold storage at 5-7°C.


Figure 1. Muskmelon fruit prepared in the packinghouse, wrapped in styrofoam cups, and packed in carton boxes before precooling and cold storage.

Cold storage could maintain quality and keep the fruit for 21-30 days, instead of 7-10 days at ambient. Weight loss is minimized and pathogen infection is prevented for up to one month of storage. The technique gives better market value of the fruit and provides more time for export shipment.

Onion drying Onions are usually dried at peak season when there is oversupply. Bulb skin is removed and bulb is sliced into uniform pieces of about 3 mm thick. The slices are spread thinly on drying trays, which are then placed on racks of an electric dryer (Fig. 2). During drying, dryer temperature is set at 60°C for the first 2 hours, increased to 70°C for the next 3.5 hours, and finally, further increased to 80°C for 4 hours. The slices are turned over every hour of drying. After drying, the trays are taken out from the dryer and the slices are air-cooled. The cooled slices are immediately packed in double layers of plastic bags of suitable size to prevent re-absorption of moisture from the atmosphere (Fig. 2).


Figure 2. Electric dryer used in onion drying and the

dried slices in double-layer plastic bags.

Recovery is usually 10% by weight of the onion bulb, with the dried slices containing 7% moisture. As an alternative method, onion slices can be dried under the sun if electricity and electric dryers are not available.

Economic Analysis Melon cold storage Cost and return analysis compares export marketing with cold storage and domestic marketing. The following cost and return items per hectare are considered in the analysis: a. Production cost per ha = 6,655,500 Kyats (MMK)

b. Production capital and overhead cost = 844,500 MMK c. Packinghouse, cold storage, logistic cost = 5,000,000 MMK d. Yield of melon per hectare = 20,000 kg e. Selling price per kg in domestic market = 500 MMK f. Selling price per kg in export market = 1,000 MMK Table 1 shows that income from export marketing is twice that from domestic marketing and the difference is more than sufficient to cover the added cost of packinghouse operations and cold storage. As a result, the net profit margin for export marketing was 50% higher than that for domestic marketing.


There are barriers to adoption of the technology and these include high investment for infrastructure, need for trained labor, and need for constant supply of electricity. Table 1. Comparative cost and return analysis per hectare production of melon for domestic market and export employing cold storage (in MMK)

Items Domestic market Export market + cold storage

Income (d*e) and (d*f) 10,000,000 20,000,000 Costs: Production cost (a) 6,655,500 6,655,500 Production capital and overhead (b) 844,500 844,500 Packing, cold storage and logistic cost (c) 5,000,000 Total cost 7,500,000 12,500,000 Net income 2,500,000 7,500,000 Net profit margin 25% 37.5%

MMK=Myanmar Kyat; 1 USD=6 MMK (official rate)

Onion drying Cost and return analysis compares producing onion for dried product processing and for fresh market. The following cost and return items per hectare are considered: a. Production cost per ha = 4,937,500 MMK b. Capital, electricity, labor and other costs for drying = 1,462,500 MMK c. Yield of onion bulb per hectare = 15,800 kg d. Selling price per kg of fresh bulb = 343.75 MMK e. Selling price per kg of dried bulb slices = 5,000 MMK f. Recovery of dried onion (10%*15,800 kg) = 1,580 Table 2 indicates that despite high production cost, drying onion could triple the net income and more than double the net profit margin compared to marketing fresh bulbs. Dried onion can keep longer in storage. Drying onions minimizes fresh-bulb storage losses due to sprouting, rotting, and desiccation. However, the dried product may not have the taste, flavor, and nutritional quality of the fresh bulb. Table 2. Comparative cost and return analysis per hectare production of onion for the fresh market and for dried product processing

Items Fresh bulb Dried bulb slices Income (c*d) and (e*f) 5,431,250 7,900,000 Costs: Production cost (a) 4,937,500 4,937,500 Capital, electricity, labor and other costs for drying (b)

1,462,500

Total cost 4,937,500 6,400,000 Net income 439,750 1,500,000 Net profit margin 8.9% 23.4%

MMK=Myanmar Kyat; 1 USD=6 MMK (official rate)


Conclusion Melon cold storage and onion drying proved to be economically feasible. However, there are impediments and trade-offs to the adoption of these technologies.


Economic Analysis of Tunnel Drying of Shiitake Mushroom and Chili in Thailand

Weerachet Jittanit

Department of Food Science and Technology, Faculty of Agro-Industry, Kasetsart University, Bangkok, Thailand

Introduction Shiitake mushroom and chili are important vegetables in the Greater Mekong Subregion (GMS) consisting of Cambodia, China-Yunnan, Lao PDR, Myanmar, Thailand, and Vietnam. Although fresh Shiitake mushroom and chili are more nutritious than dried products, a significant portion is dried during peak production due to oversupply. Drying extends storage life and reduces weight, saving on storage and transport costs and enabling year-round supply of produce (Kendall et al., 2008). Figure 1 shows the distribution of Shiitake mushroom and chili from the farm to the market. Figure 1. Supply flow of Shiitake mushroom and chili The proper moisture content of dried vegetables depends on the species, storage condition, and length of storage (Kendall et al., 2008). Lower moisture content leads to longer storage life. It has been suggested that vegetables should be dried to ≤10% (wet basis) because at this moisture content no microorganisms can grow (Schmutz and Hoyle, undated; Thadniam, 1999).


Drying methods that take longer normally lead to less flavorful and less tender product (Schmutz and Hoyle, undated). The traditional method of sun drying is common in developing countries because of its simplicity, low investment and low operating costs. However, during sun drying, drying conditions are uncontrollable; contamination from dust, insects, and microorganisms is likely and leads to low product quality (Roberts and Cox, 1999). Tunnel drying has become popular for drying fruit and vegetables in GMS. To maintain product quality, tunnel dryers are operated at medium temperatures (Soponronnarit, 1997; Thadniam, 1999). This paper describes the economic analysis of tunnel drying compared with sun drying for Shiitake mushroom and chili. The information could guide dried vegetable producers in adopting this technology or related technologies to their economic advantage.

The Technology The tunnel dryer is shown in Fig. 2 and has the following specifications: Size: width*length*height (W*L*H) = 1.2*4.8*1.6 meters Structure: galvanized-steel sheet with insulation (fiberglass) in between. Number of trolleys: 4 trolleys (W*L*H = 0.9*0.9*1.05 meters) at full load Number of trays/trolley: 7 (W*L = 0.9*0.9 meters) Energy sources: LPG for air heating, electricity for ventilation fan Production capacity: Shiitake mushroom: 300 kg/batch (fresh mushroom) Chili: 300 kg/batch (fresh chili) Energy consumption: Electricity = 1.5 unit/hour and LPG = 1.2 kg/ hour at drying air temperature 60°C

Figure 2. Tunnel dryer for Shiitake mushroom and chili, Department of Agriculture-Thailand.


Table 1 compares aspects of tunnel drying compared with sun drying. Table 1. Desired moisture content of dried Shiitake mushroom and chili and benefits of tunnel drying over sun drying

Product Parameter

Shiitake mushroom Chili

Moisture content

Fresh mushroom = 90% wet basis (WB) Dried mushroom = 10% WB (So, 9 kg mushroom can produce 1 kg dried product)

Fresh chili = 80% WB Dried chili = 10% WB (So, 4.5 kg fresh chili can produce 1 kg dried product)

Benefits of tunnel drying compared to sun drying Drying time

Sun drying 3 days/batch (varying with weather condition)

4 days/batch (varying with weather condition)

Tunnel drying 12 hours/batch at 60°C 20 hours/batch at 60°C Quality of dried product

Sun drying Grade B-C varying with weather condition, might have product loss due to spoilage, mold growth, insect, dust, surface sunburn

Tunnel drying Grade A, insect and dust can be controlled, better taste, flavor, shape, and uniform in quality

Production time

Sun drying Only daytime, production time depends on season (normally needs weather conditions of 32°C and ≤60% RH)

Tunnel drying Can produce 24 hours a day (not weather-dependent)

Economic Analysis The investment and operating costs of tunnel drying and sun drying of Shiitake mushroom and chilli are estimated based on practical applications. Tables 2 and 3 show the costs, value, and risk of dried Shiitake mushroom and chili, produced by tunnel drying compared with sun drying. Partial budget analysis of tunnel drying (relative to sun drying) was performed, and as profitability indicators, net present value (NPV), internal rate of return (IRR) and payback period (ex ante analysis) were calculated using the difference in costs and returns between tunnel drying and sun drying. Results presented in Tables 4 and 5 for Shiitake mushroom and chili, respectively, show that tunnel drying is profitable due to the positive NPV, IRR is greater than the cost of capital (10%), and the payback period was very short (≤ 1 year). It means that drying Shiitake mushroom and chili by tunnel dryer provided more profit than sun drying. Comparing the tunnel drying of Shiitake mushroom and that of chili, the former appears to be more attractive due to its higher NPV and IRR and shorter payback period than the latter.


Table 2. Costs, value and risk of sun drying and tunnel drying of Shiitake mushroom Description Sun drying Tunnel drying Production capacity 33 kg/day (dried mushroom) 33 kg/day (dried mushroom) Operating time 12 hours/day 12 hours/day Cost Initial cost Equipment 70,000 THB (Trays, racks,

etc) 500,000 THB (Dryer, trolleys, trays, etc)

Building 100,000 THB 280,000 THB Land 200,000 THB 100,000 THB Operating cost Labor (4 manpower*160 THB/

manpower *day) = 640 THB/day

(3 manpower*160 THB/ manpower *day) = 480 THB/day

Energy LPG - (1.2 kg/ h*12 THB/kg) = 14.4

THB/h Electricity - (1.5 unit/h*3 THB/unit) = 4.5

THB/h Maintenance cost - 10,000 THB/year (27.4

THB/day) Value added Market price of product 400 THB/kg (Grade B-C) 500 THB/kg(Grade A) Product loss 15%* - Risk Weather condition Increasing energy price

*15% product loss means that we need 1.15*300 = 345 kg fresh mushroom to produce 33 kg of dried mushroom. (THB: Thai Baht. 1 USD 34 THB).

Assumptions: Interest rate is 10% p.a. and useful life of dryer is 10 years. The cost of fresh mushroom production is 30 THB/kg. The market price of fresh mushroom is 150 THB/kg.


Table 3. Costs, value and risk of sun drying and tunnel drying of chili Description Sun drying Tunnel drying Production capacity 66 kg/day (dried chili) 66 kg/day (dried chili) Operating time 12 hours/day 20 hours/day 1. Cost Initial cost Equipment 90,000 THB (Trays, racks,

etc) 500,000 THB (Dryer, trolleys, trays, etc)

Building 120,000 THB 280,000 THB Land 250,000 THB 100,000 THB Operating cost Labor (5 manpower*160 THB/

manpower *day) = 800 THB/day

(3 manpower*270 THB/ manpower *day) = 810 THB/day

Energy LPG - (1.2 kg/ hour*12 THB/kg) =

14.4 THB/hour

Electricity - (1.5 unit/hour*3 THB/unit) = 4.5 THB/hour

Maintenance cost - 10,000 THB/year (27.4 THB/day)

Value added Market price of product 80 THB/kg (Grade B-C) 100 THB/kg(Grade A) Product loss 15%* - Risk Weather condition Increasing energy price

*15% product loss means that we need 1.15*300 = 345 kg fresh chili in order to produce 66 kg dried chili.

Assumptions: Interest rate is 10% p.a. and useful life of dryer is 10 years. The cost of fresh chili production is 8 THB/kg. The market price of fresh chili is 20 THB/kg.


Table 4. Partial budget analysis of tunnel drying for Shiitake mushroom Description Qty Unit Price Unit Value Unit

(A) Added Costs Initial investment cost - Equipment 430,000 THB - Building 180,000 THB

Sub-total 610,000 THB

Operating cost - Energy from LPG 360 h/mo 14.4 THB/h 5,184 THB/mo - Energy from electricity 360 h/mo 4.5 THB/h 1,620 THB/mo - Maintenance 833 THB/mo Sub-total 7,637 THB/mo (B) Reduced Return 0 (C) Reduced Costs Initial investment cost - Land 100,000 THB


Operating cost

- Raw material cost reduction (15%) 1,350 kg/mo 30 THB/kg 40,500 THB/mo - Labor 30 day/mo 160 THB/d 4,800 THB/mo Sub-total 45,300 THB/mo (D) Added Return - Increased market price of product 990 kg/mo 100 THB/kg 99,000 THB/mo Sub-total 99,000 THB/mo

NPV calculation NPV = Difference of initial investment cost + Present value of difference in operating cost + Present value of difference in return

Difference of initial investment cost = 510,000 THB (increased investment cost) Difference in operating cost = -37,633 THB/month = 451,956 THB/year (saving)

Present value of difference in operating cost = (P/A, 10%, 10 year)*451,956 = 2,777,049 THB (saving) Difference in return = 99,000 THB/month = 1,188,000 THB/year (increased return)

Present value of difference in return = (P/A, 10%, 10 year)*1,188,000 = 7,299,746 THB (increased return)

NPV = -510,000 + 2,777,049 + 7,299,746 = 9,566,795 THB IRR calculation

Difference of initial investment cost = 510,000 THB (increased investment cost)

Difference in operating cost = 451,956 THB/year (saving) Difference in return = 1,188,000 THB/year (increased return)

Sum of benefit = 1,188,000 + 451,956 = 1,639,956 THB/year

Year Cash flow difference

0 - 510,000 1 1,639,956

2 1,639,956

3 1,639,956 4 1,639,956 5 1,639,956 6 1,639,956 7 1,639,956 8 1,639,956 9 1,639,956 10 1,639,956 IRR 322%

Payback period calculation From 510,000 = (P/A, 10%, N)* 1,639,952; Payback period = < 1 year


Table 5. Partial budget analysis of tunnel drying of chili Description Qty Unit Price Unit Value Unit (A) Added Costs

Initial investment cost

- Equipment 410,000 THB

- Building 160,000 THB


Operating cost

- Energy from LPG 600 h/mo 14.4 THB/h 8,640 THB/mo

- Energy from electricity 600 h/mo 4.5 THB/h 2,700 THB/mo

- Maintenance 30 day/mo 10 THB/day 300 THB/mo

- Labor 833 THB/mo

Sub-total 12,473 THB/mo

(B) Reduced Return 0 (C) Reduced Costs

Initial investment cost

- Land 150,000 THB

Sub total 150,000 THB

Operating cost - Raw material cost reduction (15%) 1,350 kg/mo 8 THB/kg 10,800 THB/mo


(D) Added Return

- Increased market price of product 1,980 kg/mo 20 THB/kg 39,600 THB/mo


NPV calculation NPV = Difference of initial investment cost + Present value of difference in operating cost + Present value of difference in return


Difference in operating cost = 1,673 THB/month = 20,076 THB/year (increased cost)

Present value of difference in operating cost = (P/A, 10%, 10 year)*20,076 = 123,383 THB (increased cost)

Difference in return = 39,600 THB/month = 475,200 THB/year (increased return)

Present value of difference in return = (P/A, 10%, 10 year)*475,200 = 2,919,898 THB (increased return)

NPV = -420,000 - 123,383 + 2,919,898 = 2,376,515 THB

IRR calculation


Difference in operating cost = 20,076 THB/year (increased cost)

Difference in return = 475,200 THB/year (increased return)

Sum of benefit = -20,076 + 475,200 = 455,124 THB/year


0 - 420,000 1 455,124 2 455,124 3 455,124 4 455,124 5 455,124

6 455,124

7 455,124 8 455,124 9 455,124 10 455,124 IRR 108%

Payback period calculation From 420,000 = (P/A, 10%, N)* 455,120 Payback period 1 year


Acknowledgement The author would like to thank AVRDC – The World Vegetable Center (AVRDC) for the travel support to participate in the GMS Workshop on Economic Analysis of Postharvest Technologies for Vegetables.

References Kendall, P., Dipersio, P., and Sofos, J. 2008. Drying vegetables. Colorado State

University Extension – Nutrition Resources, No. 9.308. http://www.uga.edu/nchfp/how/dry/csu_dry_vegetables.pdf (accessed on 15 August 2008).

Schmutz, P.H. and Hoyle, E.H. (undated). Drying vegetables. Home & Garden Information Center: 1-888-656-9988, HGIC 3085, Clemson University Cooperative Extension Service, South Carolina, http://hgic.clemson.edu (accessed on 15 August 2008).

Thadniam, V. 1999. Industrial scale solar vegetable drying with supplemental heat from steam. Bangkok, Thailand: MSc Thesis, KMUTT.

Roberts, T. and Cox, R. 1999. Drying fruits and vegetables. Publication No. 348-597, Virginia Cooperative Extension, Virginia.

Soponronnarit, S. 1997. Drying of grain and some kinds of food, 7th ed. (Thai version). Bangkok, Thailand: KMUTT. pp. 217.

Department of Agriculture, Ministry of Agriculture and Cooperatives, Thailand. Plant Knowledge Base. http://210.246.186.28/pl_data/MACHINE/mach37.html (accessed on 15 August 2008).

Chua, K.J. and Chou, S.K. 2003. Low-cost drying methods for developing countries. Trends in Food Science & Technology 14:519-528.

Sullivan, W.G., Wicks, E.M. and Luxhoj, J.T. 2003. Engineering Economy, 12th ed. (International ed.). New Jersey, USA: Prentice Hall. pp. 665-690.


Economic Analysis of Hydrocooling and Modified Atmosphere Packaging of

Chinese Kale in Thailand

Panida Boonyaritthongchai Division of Postharvest Technology, School of Bioresources and Technology

King Mongkut’s University of Technology Thonburi, Bangkok, Thailand

Introduction Chinese kale (Brassica oleracea var. alboglabra) or Chinese broccoli, locally known as Kai-lan, is a slightly bitter leafy vegetable possessing thick, flat, glossy blue-green leaves with thick stems and small number of tiny, almost vestigial flower heads similar to those of broccoli. It is a hardy, cool-season vegetable, but some heat-tolerant cultivars can be grown in the tropics. Commercial cultivars differ considerably in leaf color and shape. After harvest, the mature leaves turn yellow within a few days if held at 20 °C or higher temperatures. The sooner the field heat is removed from the produce, the longer it will last, giving the farmer more time to sell the produce (Sargent et al., 1988). Precooling can be done in various ways and hydrocooling is one method that uses cold water to rapidly cool produce. Containers must be waterproof and allow water to pass over the produce. The containers of produce are submerged in cold water, or showered from above with recirculated cold water. After precooling, low temperature or cold holding in transit or storage is recommended. All Brassica crops last the longest when stored at 0 °C, just above the freezing point (Hardenburg et al., 1986). Specifically for Chinese kale, storage at 1°C with 90–95% RH can keep the leaves green for 10–14 days (Poochai et al., 1984; Wilson et al., 1988). Another technique is modified atmosphere packaging (MAP), which uses polymeric films to create an atmosphere of low O2 and high CO2 to inhibit physiological processes such as respiration (Hintlian and Hotchkiss, 1986). This paper provides the technical and economic benefits of hydrocooling and MAP of Chinese kale developed at the Division of Postharvest Technology, King Mongkut’s University of Technology Thonburi, Bangkok, Thailand.

The Technology Chinese kale harvested during early morning is sorted selecting only those plants free from defects and with uniform sizes. Hydrocooling is done by dipping


produce in 7 ºC water for 5.5 min or until the internal temperature drops to 7 ºC (Kornsongkaew, 2006). After that, the produce is placed on a sieve to remove excess water and air-dried for 5 min. The produce is then packed into polyethylene-laminated nylon bags 30 cm in length and 23 cm in width with 12 holes, each bag containing 250 g Chinese kale. The packed produce is held at 7 ºC, similar to temperature conditions of retail displays in supermarkets. This technique offered the following benefits: Weight loss reduction of about 6% Shelf life extension to 8 days Delayed chlorophyll breakdown and carotenoid synthesis Reduced fibrousness and no effect on Vitamin C content

Although there are many techniques to prolong the shelf life of Chinese kale, hydrocooling and MAP are cheap alternatives, easy to apply, and can be modified to suit the conditions and resources in the Greater Mekong Subregion.

Economic Analysis The economic analysis of hydrocooling and MAP of Chinese kale was performed relative to simply holding the produce at a low temperature (7 ºC). The following information was considered in the analysis: Production capacity: 80 kg/day Size of hydrocooling tank: 500 L Cost of hydrocooling tank and racks: 50,000 THB Quantity of ice: 40 kg/tank Material cost (ice, water, plastic bags, etc.): 400 THB Labor: 1 person/day Cost of labor: 100 THB/day Operating time: 4 hours/day Weight loss reduction: 5 kg/batch Increased market price due to improved quality: 10 THB/kg Postharvest loss reduction: 7.5% Price of saved produce (lower quality): 20 THB/kg

Assumptions: Interest rate: 10% per annum Useful life of hydrocooling tank: 3 years Market price of Chinese kale: 45 THB/kg Table 1 shows the partial budget analysis of hydrocooling and MAP of Chinese kale. As profitability indicators, net present value (NPV), internal rate of return (IRR) and payback period (ex ante analysis) were calculated.


Table 4. Partial budget analysis of hydrocooling and MAP of Chinese kale (80 kg/day)

1 USD=34 THB

NPV calculation NPV = Difference of initial investment cost + Present value of difference in operating cost + Present value of difference in return Difference of initial investment cost = 50,000 THB (increased investment cost)

Difference in operating cost = 880 THB/day = 321,200 THB/year (increased cost) Present value of difference in operating cost = (P/A, 10%, 2 year)*321,200 = -557,455 THB (increased cost) Difference in return = 1,025 THB/day = 374,125 THB/year (increased return)

Present value of difference in return = (P/A, 10%, 2 year)*374,125 = 649,308 THB (increased return)

NPV = -50,000 -557,455 +649,308 = 41,853 THB

IRR calculation Difference of initial investment cost = 50,000 THB (increased investment cost)

Difference in operating cost = 880 THB/day 321,200 THB/year (increased cost) Difference in return = 1025 THB/day 374,125 THB/year (increased return)

Sum of benefit = 374,126-321,200 = 52,925 THB/year


0 -50,000

1 52,925

2 52,925

IRR = 70%

Payback period calculation From 50,000 = (P/A, 10%, N)* 52,925 we found that N < 1 year

Description Qty Unit Price Unit Value Unit (A) Added Costs Fixed cost: - Equipment cost 50,000 THB Sub-total 50,000 THB Variable costs: - Materials costs 400 - Labor 1 man-day (MD) 100 THB/MD 100 THB - Transportation 500 THB/day Sub-total 1,000 THB (B) Reduced return 0 THB (C) Reduced costs - Postharvest loss reduction, 7.5% 6 kg/day 20 THB/day 120 THB Sub-total 120 THB (D) Added return - Weight loss reduction 5 kg/day 45 THB/day 225 THB - Increased market price of product

80 kg/day 10 THB/kg 800 THB

Sub-total 1025 THB


Based on the above analysis, the technique of combining hydrocooling and MAP is profitable due to the positive NPV, IRR is more than the cost of capital (10%), and the payback period is less than one year. This means hydrocooling and MAP provided more profit than simply holding the produce at a low temperature.

Acknowledgement The author would like to thank AVRDC – The World Vegetable Center (AVRDC) for the travel support to participate in the GMS Workshop on Economic Analysis of Postharvest Technologies for Vegetables.

References Hardenburg, R. E., Watada, A.E. and Wang, C.Y. 1986. The commercial storage of fruits,

vegetables, and florist crops and nursery stocks. U.S.D.A. Handbook 66. 130 p. Hintlian, C.B. and Hotchkiss, J.H. 1986. The safety of modified atmosphere packaging:

A review. Food Technol. 40:70-76. Kornsongkaew, B. 2006. Effect of hydrocooling and modified atmosphere packaging on

quality and storage life of minimally processeD Chinese kale (Brassica alboglabra Bailey). King Mongkut’s Unievrsity of Technology Thonburi, Bangkok, Thailand: M.Sc. Thesis.112 p.

Poochai, S., Ketsa, S. and Kosiyachinda, S. 1984. Effects of temperatures and packaging materials on quality and storage life of Chinese kale (Brassica oleracea var. acephala). Kasetsart J. (Nat. Sci.) 18:1–6.

Sargent, S.A., Talbot, M.T. and Brecht, J.K. 1988. Evaluating precooling methods for vegetable packinghouse operations. Proc. Fla. State Hort. Soc. 101:175–182.

Wilson, D.W., Barwick, J.M., Lomax, J.A., Jarvis, M.C. and Duncan, H.J. 1988. Lignified and non-lignified cell walls from kale. Plant Sci. 57:83–90.


Economic Analysis of Selected Postharvest Technologies for Tomato, Chili and Chinese

Mustard in Vietnam

Nguyen Thi Thuy Linh1, Hoang Le Hang1, Chu Doan Thanh1 and Antonio Acedo Jr.2

1,6Fruit and Vegetable Research Institute (FAVRI), Hanoi, Vietnam 2AVRDC-The World Vegetable Center, Postharvest Project Office,

Vientiane, Lao PDR

Introduction The AVRDC-ADB postharvest projects in Vietnam (RETA 6208 and RETA 6376) have developed techniques and recommendations in fresh produce handling and processing of major vegetables including tomato, chili, cabbage, Chinese mustard, and kangkong (Ipomoea aquatica) (Table 1). These postharvest technologies (PHT) will be further assessed in terms of their financial viability, which could facilitate technology adoption. In this workshop, three PHT are selected for economic analysis: tomato packaging, chili-tomato sauce processing, and fermented Chinese mustard processing.

Selected Technologies Tomato packaging technique Different packaging innovations are now available. Examples include carton boxes and polystyrene plastic crates (P. crate), which are used in domestic and export marketing. These two types of containers, with or without shredded paper to cushion the produce, were tested for packing tomato of different varieties and harvest maturities. The use of P. crate with shredded paper was found to be the most effective in reducing damage. Damage reduction relative to the use of carton box ranged from 11-18%, depending on the variety and stage of maturity (Table 1) due to variations in fruit firmness.

Chili-tomato sauce processing The FAVRI6-developed process in producing chili-tomato sauce was adapted (Fig. 1). Different combinations of AVRDC and commercial varieties of chili (CCA321, 9955-15, and Ox horn) and tomato (CLN2123A, CLN2498E, Perfect 89, and FM1080) were tested using full red fruit. All variety combinations 6 Sometimes referred to as Research Institute of Fruits and Vegetables (RIFAV).


produced the desired sauce quality, except that of 9955-15 chili and FM1080 tomato. Sauce quality was better maintained under dark storage condition by keeping the plastic bottles of sauce in carton boxes (Table 1).

Fermented Chinese mustard processing The FAVRI method of Chinese mustard fermentation (Fig. 2) was optimized using different salt concentrations and fermentation periods. Winter and summer optimization trials were conducted. In both trials, 8% salt was found to be the optimum concentration for producing the desired sensory quality of the fermented vegetable (Table 1). However, the optimum fermentation period differed: 2 days in summer and 4 days in winter. The high temperature condition during the summer months usually accelerates the fermentation process. The fermented vegetable can be kept in storage in plastic pouches or glass jars with a preservative solution.

Economic Analysis Partial budget analysis for the packaging technique for tomato variety CLN2123A revealed that the use of P. crate with shredded paper is financially feasible, despite the much higher cost compared with the carton box (Table 2). Profit analysis was conducted for chili-tomato sauce and fermented Chinese mustard processing (Tables 3-4). Both processed products produced a net profit, with fermented Chinese mustard having a higher income due to its lower production cost and higher market price than chili-tomato sauce.

Conclusion The three selected technologies appeared to be financially viable as income exceeded the cost of the technique. However, the degree of profitability varies with technique. Under actual commercial operation, the technical and financial viability of postharvest technologies may change.

Acknowledgement Financial support from the Asian Development Bank is gratefully acknowledged.


Figure 1. Process flow for chili-tomato sauce.


Figure 2. Process flow for fermented Chinese mustard production.


Table 1. PHT developed for tomato and chili (RETA 6208) and cabbage, Chinese mustard and kangkong (RETA 6376) in Vietnam. Vegetable/PHT PHT specifications Benefits (over usual condition as

control) Tomato Packaging system 25-kg capacity polystyrene crate with

shredded paper Damage reduction relative to carton box: Breaker fruit: CLN2123A (AVRDC var): 13% CLN2498E (AVRDC var): 18% Perfect 89 (local var): 18% FM1080 (local var): 11% Turning fruit: CLN2123A (AVRDC var): 13% CLN2498E (AVRDC var): 18% Perfect 89 (local var): 15% FM1080 (local var): 11%

Simple hydrocooler Portable, knockdown-type hydrocooler- iron-pipe frame, woven rattan liner and plastic tarpaulin; water added and cooled to10oC using ice; ordinary bulb thermometer used to monitor water temperature; fruit submerged in cold water for 12 min, air-dried, and stored at ambient and preferably at 10-13oC.

Reduced rate of fruit reddening and maintained high soluble solids at ambient and 10oC Slow rate of acidity loss at 10oC Reduced chilling injury at 10oC

Chili MAP 25 micron-thick polypropylene (PP)

plastic bags for red and turning fruit and either 25 micron-thick PP or low-density polyethylene (LDPE) for green fruit of CCA321, 9955-15, Ox horn var

Reduced WL Improved shelf life

Storage RH Humidity chamber or room with humidifier with RH controlled at 80-85%; ordinary wet and dry bulb thermometers can be used to monitor RH; tested for CCA321, 9955-15 and Ox horn var

Reduced WL after 6d to 2% compared to ambient, 5% Improved shelf life (wrinkling/shriveling reduced)

Solar dryer FAVRI solar dryer (combined features of RUA and NUL solar dryers); applicable only during summer/hot periods of the year

More rapid rate of drying More hygienic than sun drying

Chili-tomato sauce processing

FAVRI optimized technique; combination of Ox horn, CCA321 and 9955-15 chili with CLN2123A, CLN2498E, Perfect 89 and FM1080 tomato

Good sensory quality of any chili and tomato var combination except 9955-15 and FM1080; dark storage maintained quality better

Cabbage Bacterial soft rot control

Lime paste prepared as 1:1 lime powder and water mixture; as alternative, guava leaf extract as 1:1 pure extract and water mixture; applied at butt end of cabbage

Reduced soft rot incidence and trim loss: Lime: 0% Guava: 13% incidence; 2% trim loss Control: 100% incidence; 33.4% trim loss

Fermentation Optimized FAVRI method; 10% salt; 2 days fermentation in summer, 4 days in winter

Better sensory quality and shelf life than other salt levels and fermentation periods

Chinese/green mustard

MAP 25 micron-thick LDPE plastic bag at After 4d storage:


500g per bag and seal; no need of venting and ethylene scrubber

Reduced WL: MAP-1%; control-19% Reduced decay: MAP-17%; control-78%

Fermentation Optimized FAVRI method; 8% salt; 2 days fermentation in summer, 4 days in winter

Better sensory quality and shelf life than other salt levels and fermentation periods

Kangkong (Ipomoea aquatica) MAP Ambient storage: 25 micron-thick

LDPE at 500 g/bag Cold storage (13oC): 25 micron-thick LDPE or PP plastic bag

Reduced WL: Ambient: LDPE-2%; control-22% (after 3d storage) 13oC: LDPE-1.5%; PP-1.5%; control-35% (after 9d storage) Reduced decay at ambient (no effect at 13oC): LDPE-4.5%; control-19% (after 3d storage)


Table 2. Partial budget analysis for packaging tomato (CLN2123A) using polystyrene crate (per 1000 kg fruit)

COSTS Qty Price Value BENEFITS Qty Price Value (A) Added Costs ($) (C) Reduced

Costs ($)

Added cost of packaging using P. crate (over carton box)

40 0.7 28 0

Shredded paper 40 0.2 8 Labor in packing (25 kg/5 min), MD

0.5 3.5 1.75

Subtotal 37.75 Subtotal 0 (B) Reduced Return ($) (D) Added

Return ($)

0 Saving-reduced damage

130 0.5 65

Subtotal 0 Subtotal 65 Total 37.75 Total 65

Estimated net change $ 27.25

Results/Assumptions: Unit Qty

Polystyrene crate (P. crate) capacity kg 25

Number of P. crates for 1000 kg fruit pc 40

Unit cost of P. crate $ 3

Unit cost of carton box (25 kg capacity) $ 1

Price difference of packaging material $ 2

Number of use of P. crate times 3

Added cost of packaging using P. crate $ 0.7

Saving from reduced damage (Table 1) % 13

- saving per 1000 kg fruit kg 130


Table 3. Profit analysis for processing 1000kg chili-tomato sauce in 250-g plastic jar

No. Item Unit Qty Price ($)

Value ($)

1 Main raw materials (hot chili) kg 400 0.18 70.59 2 Minor raw materials Sugar kg 120 0.62 74.12 Salt kg 40 0.18 7.06 Acetic acid kg 6 1.76 10.59 Garlic kg 80 0.47 37.65 Tomatoes kg kg 400 0.12 47.06 Other food additives 29.41 3 Plastic jar (250 g) pc 4.000 0.06 235.29 4 Carton box (24 jar/carton) pc 167 0.29 49.12 5 Label, Sticky brand pc 4.000 0.01 47.06 6 Electricity, water, coal 11.76 7 Others (plastic buckets, knife, funnel) 5.88 8 Labor MD 25 2.94 73.53 9 Machine depreciation cost 17.65 10 Management cost 5.88 11 Repair and maintenance 5.88 Total cost 728.53

Cost: $ 0.18/unit; $ 728.53/ton products

Price: Wholesale: $ 0.22/unit; $ 880/ton products

Local market price: $ 0.3/unit; $ 1,200/ton products Profit (wholesale): $ 0.22 - 0.18 = $ 0.04/unit; = 880.00 - 728.53 = $ 151.47/ton products

Table 4. Profit analysis for processing 1000kg fermented Chinese mustard in 500-g glass jar

No. Item Unit Qty Price ($) Value ($)

1 Main raw materials (Chinese mustard)

kg 750 0.29 220.59

2 Minor raw materials Sugar kg 4 0.62 2.47 Salt kg 50 0.18 8.82 Food acid kg 0.6 1.76 1.06 Other food additives 11.76 3 Glass jar of 500 g p 2.000 0.16 0.32 4 Carton box (15 jar/carton) p 134 0.29 39.41 5 Label, Sticky brand p 2.000 0.01 0.02 6 Electricity, water, coal 8.82 7 Other (plastic buckets, knife, funnel) 5.88 8 Labor MD 20 2.94 44.12 9 Machine depreciation cost 5.88 10 Management cost 5.88 11 Repair and maintenance 2.94 Total cost 710.00

Cost: $ 0.36/unit, $ 710.00/ton products Price: Wholesale: $ 0.45/unit; $ 900/ton products

Local market price: $ 0.55/unit, $ 1,100/ton products Profit (wholesale): $ 0.45 - 0.36 = $ 0.09/unit; = 900.00 - 710.00 = $ 190.00/ton products


Workshop Program and Participants

GMS Workshop on Economic Analysis of Postharvest Technologies for Vegetables

19-21 August 2008

Goldiana Angkor Hotel Siem Reap, Cambodia

Scope and Objectives AVRDC – The World Vegetable Center’s ADB Postharvest Program in the Greater Mekong Subregion or GMS (Cambodia, China-Yunnan, Lao PDR, Myanmar, Thailand, and Vietnam) emphasizes technology generation and dissemination. Technology generation strives to go beyond identifying the best materials and optimum conditions that give maximum benefits by transforming the technical advantage and resources/risks involved into economic terms. Sufficient technical and economic incentives of a technology strongly stimulate dissemination efforts and increase adoption by the target clientele. Economic analysis of technologies usually requires the determination of profitability, resource requirement, and risk. Resource assessment is especially important for the resource-poor farmers, processors and other entrepreneurs the program targets. There are different methods of measuring the economic viability of technologies, such as cost and return analysis, partial budget analysis, net present value analysis and enterprise budget analysis. Even researchers with limited background in economics can successfully use these tools to evaluate technologies. The overall goal of the workshop is to build capacity and jump-start the economic analysis of postharvest technologies developed by the program. The specific objectives are to: share knowledge and expertise in measuring the economic viability of

technologies with non-economists, particularly as applied to fresh produce handling and processing of vegetables in GMS countries

analyze and deliberate the economic viability of selected technologies

developed by the program using agreed methodology.

foster regional cooperation in the Greater Mekong Subregion in vegetable postharvest technology R&D programs.


Date and Venue August 19-21, 2008 Goldiana Angkor Hotel Siem Reap, Cambodia

Program 18 August 2008 (Monday) Arrival of participants

19 August 2008 (Tuesday)

0830 Registration 0900 Welcome and opening statement Pen Vuth / Director

General, DAALI 0910 Workshop overview Antonio Acedo Jr /

AVRDC 0920 Introduction of participants 0930 Group picture and coffee break 1000 Importance and basic concepts in the economic analysis of technologies

Antonio Abamo / VSU

1020 Workshop on some basic concepts for assessing the economic viability of technologies (eg. cost/resource requirements, income/profitability measures, risks)

Antonio Abamo / VSU

1120 Methodologies for measuring the economic viability of fresh produce handling technologies (e.g. cost and return, partial budget, enterprise budget, or net present value analyses)

Antonio Abamo / VSU

1150 Workshop on some methodologies for measuring the economic viability of fresh produce handling technologies

Antonio Abamo / VSU

1250 Lunch

1350 Methodologies for measuring the economic viability of processing technologies

Tanachote Boonvorachote / KU

1420 Workshop on some methodologies for measuring the economic viability of processing technologies

Tanachote Boonvorachote / KU

1520 Coffee break

1550 Financial analysis of selected PHTs Christian Genova / AVRDC

1620 Workshop on financial analysis of selected PHTs Christian Genova / AVRDC

1900 Welcome dinner


Program (continued) 20 August 2008 (Wednesday)

Facilitators:

0830 Workshop on measuring the economic viability of PHTs developed by the project (CLV partners) and those developed by CMT partners

Antonio Abamo / VSU Tanachote Boonvorachote / KU Christian Genova / AVRDC Antonio Acedo Jr./ AVRDC

1000 Coffee break

1030 Workshop continued

1200 Lunch

1300 Workshop continued

1500 Coffee break

1530 Presentation and deliberation of workshop outputs

1630 Closure

21 August 2008 (Thursday)

0830 Field visits to farmer and small-scale enterprise adopting and/or practicing appropriate postharvest technologies

1830 Farewell dinner

22 August 2008 (Friday) Departure


Participants Participants include ADB RETA 6376 national coordinators and team members from Cambodia, Lao PDR, and Vietnam; participating partners and researchers from China (Yunnan Province), Myanmar, and Thailand; invited economics experts, AVRDC scientists, and other researchers. For inquiry, contact: Dr. Antonio ACEDO Jr. Regional Project Coordinator AVRDC-ADB Postharvest Projects PO Box 3938, Vientiane, Lao PDR Tel: +856 21 780028 Fax: +856 21 780042 Mobile: +856 20 288 3275 [email protected]

Cambodia Mr. MONG Vanndy National Coordinator, ADB RETA 6376 Project Deputy Director, Kbal Koh Agricultural Research Center Department of Agronomy & Agricultural Land Improvement (DAALI) Ministry of Agriculture, Forestry and Fisheries (MAFF) Phnom Penh, Cambodia Tel: +855 12 828 721 Fax: +855 23 720 391 E-mail: [email protected] Mr. Borarin BUNTONG Lecturer/Laboratory Supervisor, Faculty of Agro-industry Royal University of Agriculture (RUA) Phnom Penh, Cambodia Tel: +855 12 822 910 E-mail: [email protected] Ms. Tim SAVANN Trainer, Department of Agronomy & Agricultural Land Improvement (DAALI) Ministry of Agriculture, Forestry and Fisheries (MAFF) Phnom Penh, Cambodia Tel: +855 12 755 716, +855 16 566 903 E-mail: [email protected] Ms. SAMBATH Sonnthida Research Assistant of Agricultural Engineering and Postharvest Technology Cambodia Agricultural Research and Development Institute (CARDI) Ministry of Agriculture, Forestry and Fisheries (MAFF) Phnom Penh, Cambodia Tel: +855 12 648 343 Fax: +855 23 219 800 E-mail: [email protected], [email protected] Ms. SREY Sinath Research Assistant of Socio-Economics Cambodia Agricultural Research and Development Institute (CARDI)


Ministry of Agriculture, Forestry and Fisheries (MAFF) Phnom Penh, Cambodia Tel: +855 12 735 403 Fax: +855 23 219 800 E-mail: [email protected], [email protected]

China Dr. LI Hong Deputy Director and Associate Professor, Administration Department of Science and Technology Industry, Yunnan Academy of Agricultural Sciences (YAAS) Deputy General Manager, Yunnan Agricultural Science and Technology Industry Management Co., Ltd. 761 Bai Yun Road, Jiangan District, Kunming 650231, Yunnan, China Tel: +86 871 513 6613 Fax: +86 871 5125594 Mobile: +86 1388 803 0892 Email: [email protected] Dr. CHEN ZongQi Associate Professor, Agricultural Environment and Resources Research Institute Yunnan Academy of Agricultural Sciences (YAAS) Tao Yuan Village, LongTou Street, Kunming 650205, Yunnan, China Tel: +86 871 589 2211 Fax: +86 871 589 2112 Mobile: +86 1583 528 8877 E-mail: [email protected]

Lao PDR Mr. Thongsavath CHANTHASOMBATH National Coordinator, ADB RETA 6376 Project Clean Agriculture Development Center (CADC) Department of Agriculture (DOA) Ministry of Agriculture and Forestry (MAF) P.O. Box 811, Vientiane Capital, Lao PDR Tel : +856 21 78 0040 to 41 Fax: +856 21 78 0042 Mobile: +856 20 2400224 E-mail: [email protected] Mr. Chansamone PHOMACHAN Project Assistant, ADB RETA 6376 Project Clean Agriculture Development Center (CADC) Department of Agriculture (DOA) Ministry of Agriculture and Forestry (MAF) P.O. Box 811, Vientiane Capital, Lao PDR Tel : +856 21 78 0040 to 41 Fax: +856 21 78 0042 Mobile: +856 20 589 7188


Myanmar Dr. Kyaw Nyein AYE Associate Professor, Yangon Technological University (YTU) No. 503, Building A, Parami Condo Parami Road, Hlaing Township Yangon, Myanmar Tel: +95 (0) 9500802 Email: [email protected] Dr. Cho Cho MYINT General Manager Kaung Myanmar Aung Agriculture Co., Ltd. (KMAACL) No. G-3/4/5, Kandawgyi Tower Kyaikkasan Road Tamwe Township Yangon, Myanmar Tel: 95-1-5549289, 95-1-643520 Fax : 95-1-554928 Email: [email protected], [email protected]

Philippines Dr. Antonio P. ABAMO Invited Resource Person and Dean, College of Engineering and Agri-Industries Visayas State University (VSU) Visca, Leyte 6521, Philippines Tel/Fax: +63 53 335 2654 Mobile: +63 918 593 4534 E-mail: [email protected], [email protected]

Thailand Dr. Panida BOONYARITTHONGCHAI Lecturer, Division of Postharvest Technology King Mongkut’s University of Technology Thonburi Thungkru, Bangkok 10140, Thailand Tel: +66 2 4707720 Fax: +66 2 452 3750 Mobile: +66 89 123 1004 E-mail: [email protected] Dr.Weerachet JITTANIT Department of Food Science and Technology Faculty of Agro-Industry Kasetsart University 50 Phaholyothin Rd., Chatuchak Bangkok 10900, Thailand Tel: +66 2 562 5026 Fax: +66 2 562 5021 Email: [email protected]


Dr. Tanachote BOONVORACHOTE Invited Resource Person and Lecturer, Department of Agro-Industry Technology Faculty of Agro-Industry Kasetsart University (KU) 50 Phaholyothin Rd., Chatuchak Bangkok 10900, Thailand Tel: +66 2 562 5367 Fax: +66 2 562 5092 Email: [email protected]

Vietnam Ms. HOANG Thi Le Hang Deputy Head, Department of Postharvest Technology OIC National Coordinator, ADB RETA 6376 Project Research Institute of Fruit and Vegetables (RIFAV) Trau Qui, Gia Lam, Hanoi, Vietnam. Tel: +84 4 876 5627 Fax: +84 4 827 6148 E-mail: [email protected] Ms. NGUYEN Thi Thuy Linh Researcher, Department of Postharvest Technology Research Institute of Fruit and Vegetables (RIFAV) Trau Qui, Gia Lam, Hanoi, Vietnam Tel: +84 4 876 5627 Fax: +84 4 827 6148 E-mail: [email protected]

AVRDC – The World Vegetable Center Dr. Antonio L. ACEDO Jr. Regional Project Coordinator AVRDC-The World Vegetable Center (AVRDC-WVC) ADB Postharvest Project Office c/o Clean Agriculture Development Center (CADC) Department of Agriculture (DOA) Ministry of Agriculture and Forestry (MAF) PO Box 3938, Vientiane, Lao PDR Tel: +856 21 780028 Fax: +856 21 780042 Mobile: +856 20 288 3275 Email: [email protected] Mr. Christian GENOVA II Invited Resource Person and Research Assistant, Socioeconomics Unit AVRDC – The World Vegetable Center (AVRDC-WVC) PO Box 42, Shanhua, Tainan 74199, Taiwan Tel: +886 6 583 7801, Ext. 462 Fax: +886 6 583 0009 Email: [email protected]


www.avrdc.orgAVRDC – The World Vegetable CenterHeadquartersPO Box 42Shanhua, Tainan 74119Taiwan

T +886 (0) 6 583-7801F +886 (0) 6 583-0009E [email protected]

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