usdapart 610 conservation planning national resources economics handbook (200-vi, nreh, draft, june...

(200-vi, NREH, draft, June 2001)

United StatesDepartment ofAgriculture

NaturalResourcesConservationService

Part 610NationalResourcesEconomicsHandbook

Part 610 Conservation Planning

Part 610Conservation PlanningNational Resources Economics Handbook


Issued draft June 2001

The United States Department of Agriculture (USDA) prohibits discrimina-tion in all its programs and activities on the basis of race, color, nationalorigin, gender, religion, age, disability, political beliefs, sexual orientation,and marital or family status. (Not all prohibited bases apply to all pro-grams.) Persons with disabilities who require alternate means for commu-nication of program information (Braille, large print, audiotape, etc.)should contact the USDA’s TARGET Center at (202) 720-2600 (voice andTDD).

To file a complaint of discrimination, write USDA, Director, Office of CivilRights, Room 326W, Whitten Building, 14th and Independence Avenue, SW,Washington, DC 20250-9410, or call (202) 720-5964 (voice or TDD). USDA isan equal opportunity employer.

(200-vi, NREH, draft, June 2001) i

Acknowledgments

This update of the Conservation Planning Handbook for Economics wasprepared under the direction of Peter Smith, director, Renna Young Owens,economist of the Resource Economics and Social Services Division, NaturalResources Conservation Service. Karen Robinson provided excellentadministrative support. Suzi Self of the National Production Services Centeris commended for editing and formatting.

This document has been under revision since 1987. Therefore, numerousNRCS agricultural economists and others have made major contributions tothis handbook. The following economists provided extraordinary reviewand comments of the draft:

Larry Edmunds, Salt Lake City, UtahJames Featherson, Temple, TexasJune Grabemeyer, East Lansing, MichiganAaron Hinkston, Alexandra, LouisianaB. Ted Kuntz, Stillwater, OKJoDean Nichols, Bismarck, North DakotaFlorence Swartz, Syracuse, New YorkLetitia Toomer, Richmond, Virginia

Editing and formatting were completed by Mary Mattinson and Suzi Self ofthe National Production Services Center, Fort Worth, TX.

(200-vi, NREH, draft, June 2001)ii

(200-vi, NREH, draft, June 2001) iii

610.0100 Introduction 1–1

(a) Purpose and scope ........................................................................................ 1–1

(b) Conservation effects for decisionmaking .................................................. 1–1

610.0101 Economics and the planning process 1–1

(a) Objectives ...................................................................................................... 1–1

(b) The nine step planning process ................................................................... 1–1

610.0102 Benefits of conservation 1–3

(a) Onsite benefits .............................................................................................. 1–3

(b) Offsite benefits .............................................................................................. 1–4




610.0103 Costs of conservation 1–4

(a) Expenditures ................................................................................................. 1–4

(b) Lost production ............................................................................................. 1–4

610.0104 Agricultural business environment

effects on conservation purchases 1–5

(a) Economic prosperity .................................................................................... 1–5

(b) Economic stress ............................................................................................ 1–5



(b) Background ................................................................................................... 2–1

610.0201 Decisionmaking 2–2

(a) Relative weights ............................................................................................ 2–2

(b) Level of detail ................................................................................................ 2–3

(c) Period of analysis .......................................................................................... 2–3

610.0202 Economic factors influencing private decisions 2–4

(a) Distributing costs and benefits ................................................................... 2–4

(b) Balancing gains and losses .......................................................................... 2–4

Part 610National Economics Handbook

Contents

Part 610National Resources Economics Handbook

Contents

iv (200-vi, NREH, draft, June 2001)

(c) Timing ............................................................................................................. 2–4

(d) Interest rates .................................................................................................. 2–4

(e) Depreciation .................................................................................................. 2–5

(f) Inflation .......................................................................................................... 2–5

610.0203 Evaluating options 2–6

(a) Least cost option ........................................................................................... 2–6

(b) Maximization of net gains (income) ........................................................... 2–6

(c) Types of analysis ........................................................................................... 2–7


610.0301 Reasons for non-adoption 3–1

(a) Unable to adopt ............................................................................................. 3–1

(b) Being unwilling to adopt .............................................................................. 3–2

(c) Using decisionmaking information............................................................. 3–3

(d) Example: Matrices ........................................................................................ 3–4

610.0302 Observations about adoption 3–4



(b) The time value of money .............................................................................. 4–1

(c) Opportunity costs ......................................................................................... 4–1

610.0401 Timing 4–2

(a) One-time values, annuities, and lags .......................................................... 4–2

(b) Average annual values .................................................................................. 4–2

610.0402 Interest 4–3

(a) Simple interest .............................................................................................. 4–3

(b) Compound interest ....................................................................................... 4–3

610.0403 Calculating Interest and Annuities 4–4

(a) Present value of one ..................................................................................... 4–4

(b) Amortization .................................................................................................. 4–5

(c) Amortization key ........................................................................................... 4–5

(d) Present value of an annuity of 1 per year .................................................. 4–6

(e) Amount of an annuity of 1 per year ............................................................ 4–7

(f) Sinking fund ................................................................................................... 4–8

(g) Present value of an increasing annuity ...................................................... 4–8

(h) Present value of a decreasing annuity ........................................................ 4–9

v


Contents


610.0402 Interest 4–4



610.0403 Calculating interest and annuities 4–6

(a) Present value of 1 .......................................................................................... 4–6

(b) Amortization .................................................................................................. 4–6


(d) Present value of an annuity of 1 per year .................................................. 4–9

(e) Amount of an annuity of 1 per year ............................................................ 4–9

(f) Sinking fund ................................................................................................. 4–10

(g) Present value of an increasing annuity .................................................... 4–10

(h) Present value of a decreasing annuity ...................................................... 4–11


610.0501 Partial budgeting 5–1

(a) Method ........................................................................................................... 5–1

(b) Example ......................................................................................................... 5–1

610.0502 Break-even analysis 5–3

(a) Method ........................................................................................................... 5–3

(b) Example ......................................................................................................... 5–3

610.0503 Cost and Price Indexes 5–7

(a) Inflation .......................................................................................................... 5–7

(b) Commonly used indexes .............................................................................. 5–7

610.0504 Cost effectiveness 5–14

(a) Method ......................................................................................................... 5–14

610.0505 Marginal analysis 5–14

(a) Method ......................................................................................................... 5–14


610.0601 Cost and return estimator (CARE) 6–1

610.0602 Erosion productivity impact calculator (EPIC) 6–2

610.0603 Grazing lands application software (GLA) 6–3


Contents

vi (200-vi, NREH, draft, June 2001)

610.0604 Interactive conservation evaluation (ICE) 6–4

Glossary

Appendix

Figures Figure 1–1 Conservation planning 1–2

Figure 2–1 Expected yield levels over time, with and without 2–1

conservation

Figure 4–1 Simple interest 4–4

Figure 4–2 Compound interest 4–5

Figure 4–3 Value of 1 4–6

Figure 4–4 Amortization 4–7

Figure 4–5 Amortization key 4–8

Figure 4–6 Sinking fund 4–10

Figure 4–7 Present value of an increasing annuity 4–11

Figure 4–8 Present value of a decreasing annuity 4–12

Figure 5-1 Partial budget worksheet 5–2

vii


Contents


Tables Table 3-1 Low initial cost systems (LICS) 3–5

Table 3-2 Crop residue management (CRM) 3–6

Table 3-3 Agroforestry—Windbreak technologies 3–7

Table 3-4 Worksheet 3–8

Table 4–1 Examples of one-time values, annuities, and lagged values 4–2

Table 4–2 Annual loan payment activity during a 10-year period 4–3

Table 5-1 Prices received by farmers: index numbers by groups 5–10

of commodities and ratio, United States 1975-87

and 1988-1998

Table 5-2 Prices paid by farmers: Index numbers by groups of 5–11

commodities, United States, 1975-89

Table 5-3 Consumer price index 5–12

Table 5-4 Construction cost index history, 1906-1992 5–13

Examples Example 5-1 Partial budgeting example 5–4

Example 5-2 Break-even analysis 5–5

Example 5-3 Sample problems and solutions 5–6

Example 5–4 Soybean budget 5–8

Example 5-5 Computing average annual cost life cycle cost analysis 5–15

1–i(200-vi, NREH, draft, June 2001)

Chapter 1 Benefit and Costs

Contents 610.0100 Introduction 1–1


(b) Conservation effects for decisionmaking .................................................. 1–1

610.0101 Economics and the planning process 1–1

(a) Objectives ...................................................................................................... 1–1

(b) The nine step planning process ................................................................... 1–1




610.0103 Costs of conservation 1–4

(a) Expenditures ................................................................................................. 1–4

(b) Lost production ............................................................................................. 1–4

610.0104 Agricultural business environment effects on conservation 1–4

purchases

(a) Economic prosperity .................................................................................... 1–4

(b) Economic stress ............................................................................................ 1–4

Figure Figure 1–1 Conservation planning 1–2

1–1(200-vi, NREH, draft, June 2001)

Chapter 1 Benefits and Costs

610.0100 Introduction

(a) Purpose and scope

This chapter addresses the purpose and policy ofcarrying out the mission of NRCS with respect toeconomics for conservation planning. The purpose ofthis handbook is to document the use of economictools and integrate economics into conservationplanning. It provides guidance in identifying onsite andoffsite benefits, costs of conservation, and how eco-nomics can fit into and influence the planning process.

As consumers, we weigh the benefits and costs of ourdecisions. Aspects that cannot be measured in dollarsinfluence many of those decisions. However, mostoften we try to compare the benefits of a purchase orinvestment to its costs. For example, someone consid-ering the purchase of a computer to help manage theirbusiness might compare the benefits of a more orga-nized and efficient business to the cost of time re-quired to learn how to use a computer system andincorporate business records.

Decisionmaking for the landowner in farming orranching is the same as any other decisionmaking.Once a problem is identified, physical and monetaryeffects of alternatives can be compared. One of thelandowners many concerns is whether potential ben-efits from installing new conservation measures wouldoutweigh the costs.

(b) Conservation effects for deci-sionmaking

When assisting a landowner, the important effects,which are the basis for the decisionmaking processmust be discerned. The Conservation Effects forDecisionmaking (CED) framework (chapter 5) pro-vides general background information on how toorganize concerns, effects, and other information toassist the landowner in making conservation deci-sions. The CED workbook provides a comprehensivetraining program for those individuals who wish to usethe framework to help make effective conservationplans with the landowner.

610.0101 Economics andthe planning process

(a) Objectives

The Natural Resources Conservation Service (NRCS)National Planning Procedures Handbook (NPPH) isused by NRCS to assist people in making informeddecisions in the wise use and conservation of re-sources. The key is involving the landowner in theplanning process. NRCS helps landowners to achieveboth their objectives and those of society for sustaineduse of soil, water, air, plant, and animal resources (fig.1–1). NRCS uses a planning and implementation pro-cess to:

• help landowners understand their resources andresource management needs, potentials, andproblems;

• identify alternative solutions to these problems;• determine effects of alternative solutions, includ-

ing comparison of effects expected if the prob-lems remain untreated;

• choose alternative solutions that are consistentwith the landowner's objectives; and

• implement and maintain feasible solutions asrapidly as is practical.

(b) The nine step planning pro-cess

NRCS uses a three-phase, nine-step planning processthat leads to implementation. This process is used inall instances where assistance is provided to landown-ers (client and landowner are interchangeablethroughout this handbook) regardless of the expectedoutcome or scope of the planning effort, the type ofconservation treatments involved, or the source offunding to be used for implementation. While the ninesteps are shown in sequence, the process is verydynamic.

Part 610Conservation PlanningNational Resource Economics Handbook

Benefits and CostsChapter 1

1–2 (200-vi, NREH, draft, June 2001)

The degree of detail used in the planning processvaries with the type, method, and scope of assistance;the complexity of the planning situation; and therecipient. Using the process creates a consistentmethod nationwide. The steps are:

Step 1 Identify problems and opportunitiesStep 2 Determine objectivesStep 3 Inventory resourcesStep 4 Analyze the resource dataStep 5 Formulate alternativesStep 6 Evaluate alternativesStep 7 Make decisionsStep 8 Implement the planStep 9 Evaluate the plan

Figure 1–1 Conservation planning

I.

Collection and Analysis

II.

Decision Support

III.

Application and Evaluation

Inventoryresources

Determineobjectives

Analyzeresource

data

Formulatealternatives

Evaluatealternatives

Makedecisions

Implementthe plan

Evaluatethe plan

Identifyproblems

This planning process requires the use of skills frommany disciplines, such as economics, agronomy, soils,and engineering, to achieve the highest quality ofassistance. Economics is one discipline that shouldplay an important role throughout the planning pro-cess. It enters into the process most heavily duringPhase II.

Alternative economic concepts and principles areapplied to formulate the conservation plan (step 5).Considerations factor the relationship between thecost of the system and changes in resource conditionsthat will occur. Comparisons of the costs of practicesto their effects on the resource lead to formulation of acost-effective alternative. When more than one conser-vation plan alternative is evaluated (step 6), econom-ics factors in.




610.0102 Benefits of con-servation

Benefits from conservation are numerous and occuroffsite as well as onsite. Onsite benefits occur at orclose to the location of the conservation activity,generally to the owner of the resource where theconservation activity was undertaken. These benefitscan be divided into at least two types: maintaining orrestoring productivity, and decreasing productioncosts. Offsite benefits occur in a different locationthan the conservation activity and may occur to differ-ent owners. A detailed record of conservation effectsthat can be expected in specific resource settings arein sections III and V of the Field Office TechnicalGuide.

(a) Onsite benefits

(1) Maintaining productivity

Maintaining productivity means maintaining cropyields by protecting the soil from erosion as well asconserving water. Crops need sufficient nutrients,water, and soil that has adequate tilth and organicmatter for their passage, which allows adequate rootgrowth.

Where erosion occurs, crops often cannot absorbbasic needs. Through the removal of topsoil, winderosion reduces the capacity of the soil to hold mois-ture and degrades the soil profile. Water erosionsimilarly removes topsoil, reducing the quality andquantity of the soil and causing nutrients to be lost. Itcan also cause onsite crop damage by forming gulliesand depositing sediment. Both of these effects lowerproductivity by reducing and sometimes eliminatingcrop stands in certain areas.

Where conservation practices are used to reduce soilloss and conserve moisture, yields can be maintainedand enhanced. These practices are designed to keepsoil, nutrients, and water where they are needed.

(2) Decreasing production costs

Some conservation practices are beneficial to thelandowner because the costs may be reduced. Prac-tices, such as conservation tillage and no-till, reduce

the number of trips over the field saving the land-owner time, fuel, and machinery wear. However, weedand insect control costs may be increased. Othermeasures that convert row crops to other land usespermit the landowner to use less fertilizer and fewerchemical inputs in these areas. Examples are fieldborders and grassed waterways. These measuresinvolve converting sometimes low yielding row cropareas, such as end rows and watercourses, to grass.The landowner saves production costs because theseconverted areas usually require less input than the rowcrops they displaced.

(b) Offsite benefits

Offsite damages, which may include sediment deposi-tion and reduced water quality, result as eroded soil istransported and deposited by the actions of wind orwater. The sediment can fill in ditches, plug culverts,reduce the useful life of reservoirs and ponds, destroyfences, destroy and damage crops, and transport farmpesticides and fertilizers.

Conservation practices can be installed to reduceoffsite damages. This reduction is considered aneconomic benefit and should be considered in thedecisionmaking process. Through conservation, thetransport of material that pollutes the ecosystem,damaging wildlife and aquatic habitat, can be dramati-cally reduced.

The most effective way to avoid offsite pollution is tokeep soils from eroding and chemicals on the fieldswhere they are applied. Practices that reduce soil loss,sediment, and chemical pollutants may be useful inmaintaining or improving water quality. This may notbe true in all cases. For example, with a soil where theleaching of soluble phosphorus is a problem, no-till insome circumstances makes the problem worse.




610.0103 Costs of conser-vation

(a) Expenditures

(1) Up-front costs

Given the potential onsite and offsite benefits ofconservation, possibly one reason it is not morewidely adopted is that conservation involves up-frontinvestment costs. The most obvious cost is installingthe practice. This may include the material, land,labor, and equipment necessary to get the conserva-tion practice on the ground according to NRCS specifi-cations.

(2) Operation and maintenance

Operation and maintenance (O&M) are costs thatoccur throughout the lifetime of the practice, andensure that it continues to function properly. Fertiliz-ing a waterway, operating a pump, or reseeding aterrace backslope are examples of O&M.

Changing tillage practices may cause other costs to beincurred. For example, in some soils applications offertilizers and pesticides must be increased whenswitching to conservation tillage or no-till. Increasedproduction costs must be accounted for in thesesituations. These costs may be partly offset by feweroperations, better timing of operations, and lowerequipment repair costs resulting from the eliminationof gullies.

(b) Lost production

Another cost for some conservation practices is thecost of lost production. When certain practices areinstalled, previous production from the area is fore-gone. Waterways and certain types of terraces takeland away from cropland. If the yields from theseareas are initially low, then the loss will be small.However, if previous yields are high, then the cost ofinstalling waterways will also be high in terms of lostproduction.

610.0104 Agriculturalbusiness environmenteffects on conservationpurchases

Commonly accepted benefits and costs of conserva-tion have been described. However, a decision that iseconomically sound (i.e., where the net benefits fromall sources have been maximized) may not be a gooddecision for the farmer. A landowner's economicsituation should be considered before recommenda-tions are made. How the agricultural business environ-ment (interest rates, the farm program, politics) af-fects a landowner's decision about applying conserva-tion needs to be addressed.

(a) Economic prosperity

During times of prosperity, landowners usually caninvest in long-term conservation. Installation of con-servation practices is often a good way to reduce thetax burden in a year of high profits, making conserva-tion an intelligent investment. However, benefits fromconservation sometimes take time to materialize,while the costs are up-front. Therefore, liquidity, cashflow, or profitability can become a big problem formany landowners considering conservation invest-ments (see appendix B).

(b) Economic stress

Practices with high installation costs and benefits thattake time to materialize may be a good alternativefrom a conservation viewpoint, but not feasible for thelandowner. In times of economic stress, applying partof a system that will yield some benefits may be betterthan not applying a practice at all. When the land-owner's economic situation improves, the remainingpractices of the long-term conservation plan could beapplied, enabling the landowner to reap the full ben-efits of conservation.

2–i(200-vi, NEH, draft, June 2001)

Chapter 2 Basic Considerations andEconomic Principles



(b) Background ................................................................................................... 2–1

610.0201 Decisionmaking 2–2

(a) Relative weights ............................................................................................ 2–2

(b) Level of detail ................................................................................................ 2–3

(c) Period of analysis .......................................................................................... 2–3

610.0202 Economic factors influencing private decisions 2–4

(a) Distributing costs and benefits ................................................................... 2–4

(b) Balancing gains and losses .......................................................................... 2–4

(c) Timing ............................................................................................................. 2–4

(d) Interest rates .................................................................................................. 2–4

(e) Depreciation .................................................................................................. 2–5

(f) Inflation .......................................................................................................... 2–5

610.0203 Evaluating options 2–6

(a) Least cost option ........................................................................................... 2–6

(b) Maximization of net gains (income) ........................................................... 2–6

(c) Types of analysis ........................................................................................... 2–7

Figure Figure 2–1 Expected yield levels over time, with and 2–1

without conservation

2–1(200-vi, NEH, draft, June 2001)

Chapter 2 Basic Considerations andEconomic Principles



This chapter defines and illustrates economic prin-ciples and procedures that can contribute to effectiveconservation planning and decisionmaking. Majoremphasis is placed on the identification and account-ing of effects for purposes of comparison and selec-tion. Economics is inseparable from planning andshould be used to provide professionally responsibleinformation that enables decisionmakers to comfort-ably make informed decisions about implementingconservation.

(b) Background

(1) Options with and without

Some physical situation, such as erosion or yield level,is currently, or expected to be, at a condition that isundesirable, unacceptable, or less than possible.Additionally, this situation can be corrected, if desired,by actions or activities called conservation practices.The estimated future situation without conservation

practices should be compared to the situation ex-pected with their implementation. The differencebetween the without and with options is the impact ofconservation. The future without situation serves as abenchmark for the analysis. Identifying the benchmarksituation is the first step in the conservation effects fordecisionmaking framework.

(2) Example: Salts in the root zone

Estimating future effects is important. They should bestated objectively and must be made in reference totime. Consider an example where current managementis causing an accumulation of salts in the root zone.Without treatment, continuing accumulations areexpected to have a damaging effect on crop yield (seeline AB in fig. 2–1). With adoption of a conservationsystem, salt accumulated in the root zone will bereduced and crop yields will be maintained (see lineAC in fig. 2–1). The change in yield resulting fromadoption of the conservation system is the area ABC,when evaluated over the 25-year period. If additionallabor is the only cost of implementing the conserva-tion system and yield change is the only gain, determi-nation of the relative worth of adoption is made bycomparing the value of the yield gain to the cost ofadditional labor.

Figure 2–1 Expected yield levels over time, with and without conservation

70:

:

:

:

:

:

:

60:

50:

40:

30:

20:

10:

0:

A CFuture with

Future withoutB

Pesent Present

Years

Yie

ld u

nit

s/a

cre

25 Y


Basic Considerations and

Economic Principles

Chapter 2


Estimates of future conditions without and with treat-ment are commonly made by using an inventory of thecurrent situation as a starting point. Historical trendsare then projected while current relationships andforeseeable developments are considered. Projectionsshould reflect the views of the decisionmakers, re-search, and other published data, such as soil surveys.The expectations of the future without situation andthe with treatment alternative must be tempered bylocal judgment.

610.0201 Decisionmaking

Effective conservation planning must involve both thelandowner and the conservation planner. Togetherthey need to identify the important physical and eco-nomic factors that are to be examined and look intothe future to identify any changes in conditions with-out and with conservation. In addition, the landownerneeds to identify the relevant time horizon. Ultimately,the landowner must also place relative values on gainsand losses for the final analysis.

The process of decisionmaking is one of balancing thegains against the sacrifices of each option to deter-mine which one produces the largest net gain or thesmallest net loss. Once those options are identified,the process enables comparison to select the mostdesirable option.

(a) Relative weights

The landowner must place relative values on gains andlosses to determine their individual weight in thedecisionmaking process. Often the factors comparedare not compatible in kind, place, or time. Some ef-fects may have a common denominator, such as amarket price, while others do not. Landscape appear-ance and the presence of endangered wildlife speciesare two examples where commonly held absolutevalues do not exist.

Actions taken in one place, or by one individual, maycreate change in another location, or to another indi-vidual. For example, a change in a feed crop resourcemay impact grazing resources, or the downstream/offsite impacts of erosion may affect water quality forrecreation. Similarly, actions taken in one periodcreate effects in another. The effect of current soilerosion on the ability of future generations to producefood and fiber and the impact of the current manage-ment regime on the options for future management ofnative plant communities are two examples.




Economic Principles

Chapter 2

The process of decisionmaking is not limited to factorsthat have common denominators, but allows thecomparison of tradeoffs within and between alterna-tives. Ultimately, decisions are made that place rela-tive weights on each consideration. The landowner,not the assisting professional, places value on thequantities identified in the planning process.

(b) Level of detail

Assistance is normally provided up to the point wherelandowners can comfortably make an informed deci-sion about conservation actions. The kind and amountof information are different for every individual andevery situation.

The simplest evaluation may consist of identifying themost obvious physical impacts stemming from theproblem and estimating the costs of the conservationpractices to address these problems. For example,upon learning that ephemeral gully erosion will beeliminated by a terrace system costing $40 per acre,some landowners would be ready to make a decision.Most of the questions posed by landowners can beanswered with this approach.

An intermediate evaluation could be done for morespecific resource questions that often require moredetailed answers. Chapter 5, Evaluation Techniques,presents some useful ways to enable a more detailedevaluation of a particular option.

When the landowner requests a detailed analysis, theconservation planner may need to request directassistance from a state office economist. In somecases the landowner may need financial or cash flowanalysis. If NRCS does not have this type of assistanceavailable, a farm management specialist may be re-quired.

(c) Period of analysis

Two analytical concerns in decisionmaking are deter-mining the length of time over which individual effectsare to be considered and assuring that these effectsare considered on a common time basis. The length oftime over which effects are considered is called theperiod of analysis. The landowner is responsible for itsidentification. General factors affecting the landownerin the determination include sociological ones, such asage of the landowner and whether the children willfarm.

Economic factors that constrain the period of analysisinclude the physical deterioration of capital invest-ment (farm equipment and conservation practices)and obsolescence because of improvements in tech-nology. The period of analysis should not exceed theshorter of the planning horizons, the repayment periodor the physical life of the alternative. However, if theselected planning horizon is shorter than the physicallife of the alternative, the benefits that accrue beyondthe period analyzed must be carefully analyzed.

A period of analysis is established so that gains andlosses may be compared on the same or equivalenttime basis. The common time basis for comparison ofeffects can be any one year during the period of analy-sis or an average annual amount over the period. Forexample, all effects can be capitalized and comparedat the end of the period or discounted and comparedin present value terms. Frequently, gains and lossesare calculated and stated in average annual terms.Further definitions and procedures for expressingvalues on a common time basis are provided in Chap-ter 4, Time and Money.



Economic Principles

Chapter 2


610.0202 Economic fac-tors influencing privatedecisions

Thus far, the general description of analytical prin-ciples and the decisionmaking process has been withinthe context of comparing all gains and all losses overan identified period. The criteria used is that whengains exceed losses, the option is economic and thatthe selected best option tends toward the optimumeconomic option. However, several factors can signifi-cantly alter the judgment of whether an alternative isfeasible and which alternative is best.

(a) Distributing costs and benefits

An important consideration is who pays the cost andreceives the benefits. On the gains side of the situa-tion, quantified effects must be recognized—to whomdoes the gain accrue. The conclusion should not bemade that only personal gains have value to landown-ers.

On the losses side, who pays the costs must be consid-ered. Monetary costs, considered a loss, may begreatly impacted by cost share or income tax treat-ment. Cost share and current provisions for invest-ment tax credit on some conservation treatmentcomponents can directly reduce out-of-pocket costs tothe individual.

(b) Balancing gains and losses

To balance gains against losses, individuals must giveweights, or prices, to items considered. Such items ascommodities are generally priced based upon futuremarket expectations tempered by past and currentconditions. However, such items as labor may not bereadily priced even though a labor market may exist.Commitment of or savings in labor may not changeout-of-pocket cash costs or add to cash revenue.Savings in labor have cash value only when cashpayments to labor are reduced or cash revenue isgenerated from use of the saved labor in an alternativeactivity. However, saved labor may have physicalvalue as leisure time. Similarly, commitment of labor

has cash cost only when additional cash payment ismade to labor or committed labor reduces cash rev-enue when taken out of employment in an alternativeactivity.

The example of labor value demonstrates the eco-nomic concept of opportunity cost, which relates thevalue of a good or service to the opportunities avail-able for alternative employment. The landowner mustplace the values, or prices, on the items considered asgains or losses. Therefore, quantification of effects,gains, and losses should begin with physical measures,such as bushels, gallons, hours, and pounds, whenpossible.

(c) Timing

Proper accounting and valuation of effects anticipatedover a period of analysis may lead to conclusions oneconomic feasibility and identification of the economi-cally best alternative, but may not lead to implementa-tion. A close examination of when gains are realizedand when losses are required may reveal that short-term financial demands exceed short-term ability topay. Comparing the timing of gains and losses definesthe financial term cash flow. Options that require nearterm losses or expenditures to achieve benefits in alonger term are susceptible to financial unfeasibilityeven though total gain exceeds total loss.

Comparison of gains and losses on an equal time basisrequires the use of concepts described in chapter 4. Aframework for evaluating various options is providedin chapter 5.

(d) Interest rates

An aspect of the economic concepts presented inchapter 4 is the interest rate used to equate items intime. This rate can have a substantial effect on thejudgment about economic feasibility and anindividual’s selection of the best option. As the interestrate used in evaluation is increased, effects occurringfurther into the future have relatively less value. Selec-tion of the interest rate used in evaluation is the re-sponsibility of the landowner. It should reflect whatearning power is given up (the opportunity cost) orwhat must be paid.




Economic Principles

Chapter 2

When self-owned resources are committed to imple-mentation of an option, the earnings of those re-sources in their alternative employment must beforfeited. That rate of earning power forfeited is theappropriate interest rate. Borrowed resources requirerental payments to the owner of the resource becauseof its earning power. The rate of rental payment is theappropriate interest rate. It is important to recognizethat in a situation where self-owned resources arecommitted, even though total gains exceed totallosses, the cash position of the landowner would notbe improved unless net gains exceeded the earningsthat would have been realized from an alternative useof the resources.

(e) Depreciation

Depreciation is the anticipated reduction in the valueof an asset over time, caused through physical use orobsolescence. In accounting, depreciation refers to theprocess of amortizing or allocating a portion of theoriginal cost of a fixed asset, such as a tractor, to eachaccounting period. The value is gradually used up(written off) during the estimated useful life of theasset. Allowance may be made for the ultimate esti-mated resale value of the fixed asset (its residualvalue) to remain at the end of its useful life to theenterprise. The two principal types of depreciationmethods are:

• Straight-line depreciation—allocates the cost of afixed asset in equal amounts for each accountingperiod.

• Accelerated depreciation—allocates a largerproportion of the original cost to earlier account-ing periods and a smaller proportion to laterperiods.

(f) Inflation

An increase in the general price level of an economy isinflation. Inflation occurs when the quantity of moneyin circulation rises relative to the quantity of goodsand services available. The result is too much moneychasing too few goods, and prices are bid up. At highrates of inflation, people begin to lose confidence inmoney. The quantity of money in circulation increasesrelative to expenditures in current prices, as peopletend to hold (hoard) goods rather than money. Infla-tion is associated with a rise in gross national expendi-ture at current prices that is greater than the increasein the real supply of goods and services.

In watershed project analysis (PL-566 projects), thecustomary analytical approach is to work in constantprices rather than current prices and to assume thatinflation will affect the prices of nearly all costs andbenefits equally. Specified costs and benefits arevaried in comparison with the others so that theirrelative prices change. Using constant prices allowsthe analyst to avoid making risky estimates of futureinflation rates and to simplify the analytical proce-dures.



Economic Principles

Chapter 2


610.0203 Evaluatingoptions

(a) Least cost option

(1) Comparing losses

In situations where defined objectives require theachievement of a minimum level of performance oroutput, the problem is reduced to searching out theoption that requires the least amount of loss (leastcost). Usually the question does not include determi-nation of economic feasibility. However, implementa-tion continues to be dependent upon the measurablemonetary aspects of the option considered by thelandowner. The problem can, therefore, be viewed as acomparison of the losses of one option against thoseof another, and a search for that option that costs theleast. Again, the landowner must place a value onitems considered in the balancing process and must becognizant of factors described in the previous section.Analytical principles are employed that define effectsby examining the future with and without situationsand comparing them on an equal time basis.

(2) Example: water quality

Consider an example where plans and laws, such asthe 1972 Clean Water Act as amended (Section 208),are used to enforce minimum standards for waterquality and maximum standards for permissible dis-charge. For a landowner, such as a dairy owner, tocontinue in business, the choices faced may be re-duced to compliance or jail. Assuming jail is not adesirable option, the problem is reduced to finding theleast cost means of compliance.

(3) Considerations

From an economic viewpoint, any conservation prac-tice selected for installation should not be more costlythan any other reasonable means of accomplishing thesame level of conservation. Comparison of costs for allalternatives considered is essential and should includethe estimate of operation and maintenance expendi-tures and the average annual installation costs.

Any costs occurring in the future, monetary or non-monetary, need to be identified and converted to acommon time base. Some particular nonmonetarycosts, such as the potential loss in water quality in acreek that would receive runoff from a grassed water-way, may not be easily expressed in dollars. This,however, does not mean that they are not importantand certainly does not exclude them from the evalua-tion process.

(b) Maximization of net gains(income)

(1) The best option

In the decisionmaking process described, the bestoption is that alternative with the greatest net gainfrom the viewpoint of the individual landowner. Thebest alternative would be considered the economicoptimum if selection were made from a very largenumber of alternatives. The selection process is one ofreplacing the benchmark situation only when anotheralternative is found with more net gain. Another viewof the process is the comparison of the change in gainsbetween alternatives to the change in losses betweenalternatives, using the criteria that as long as addedgains exceed added costs (losses), additional net gainis realized. In other words, additional losses are madeonly to the point where they are offset by added gains.In the formulation of alternatives that are comprisedof separate practices, each practice should be exam-ined to determine if that practice adds more gain thanloss.

(2) Example: animal waste

For example, consider the land disposal portion of ananimal waste management alternative where applica-tion of manure on either or both of two field crops ispossible (all other factors held constant). The nutrientvalue of the manure would be allocated where themost net gain could be expected. Optimum economicallocation would be achieved by allocating increments(tons or gallons) to the crops in order of highest valueof crop response to the nutrients. This requires recog-nition of another important physical concept. Succes-sive units of manure (crop nutrients) applied to a crophas smaller and smaller effects on crop yield until,finally, it has a negative effect on the crop if appliedbeyond a certain level. This diminishing response to




Economic Principles

Chapter 2

inputs is called diminishing returns. It is importantbecause at some level of allocation of manure to oneof the crops, yield response and, therefore, value isreduced to the point where application should beshifted to the other crop. The final allocation may bedetermined after several successive shifts betweencrops, until either total manure is allocated or gains nolonger exceed costs.

(3) Nonquantified values

An important exception to diminishing returns is thatgains are usually expressed only in dollars. Therefore,any nonquantified values would be excluded from netgains or net loss figures. Because of the presence ofthese nonquantified personal or societal values, land-owners often seek to achieve a level of conservationthat is different from the level that maximizes onlymonetary net gains.

(c) Types of analysis

(1) Sensitivity analysis

Sensitivity analysis can be used to systematically testwhat happens to the feasibility of a conservation planif events differ from the estimates made in planning. Itis a means of dealing with uncertainty about futureevents and values. A sensitivity analysis is done byvarying one element or a combination of elements anddetermining the effect of that change on the outcome.With a conservation plan, testing for the effects onearning capacity of changes in prices, cost, delay inimplementation, and changes in yield may be useful.Sensitivity tests need not be directed at the effect of achange on project worth. The test may be made, forexample, to determine the effect of a delay in benefitson the cash position of a farmer who has borrowed foran irrigation pump. Variations on sensitivity analysismay also include evaluation risk, interest rates, andprices.

Risk is the probability or chance that something will orwill not occur as planned. For example, what is thechance that yields will reach the prescribed level?What is the likelihood that the system will be morecostly than expected? The impact of these occur-rences can be tested using sensitivity analysis. Theycan also be evaluated using a formal procedure calledrisk analysis.

(2) Risk analysis

Risk analysis can be more narrowly described as ananalytical technique in which probabilities of occur-rence are determined for all critical conservationoption elements. Then, by computer, repeated compu-tations of a measure of option worth are made, eachelement entering in successive computations accord-ing to its probability of occurrence. The result is mostcommonly reported in the form of a cumulative prob-ability curve, plotted on a graph in which the verticalaxis represents the probability a measure of optionworth will fall below a stated value and the horizontalaxis represents the values of the measure of optionworth.


Chapter 3 Why Landowners Adopt Conservation


610.0301 Reasons for non-adoption 3–1

(a) Unable to adopt ............................................................................................. 3–1

(b) Being unwilling to adopt .............................................................................. 3–2

(c) Using decisionmaking information ............................................................. 3–3

(d) Example: Matrices ........................................................................................ 3–4

610.0302 Observations about adoption 3–4

Tables Table 3-1 Low initial cost systems (LICS) 3–5

Table 3-2 Crop residue management (CRM) 3–6

Table 3-3 Agroforestry—Windbreak technologies 3–7

Table 3-4 Worksheet 3–8


Chapter 3 Why Landowners Adopt Conservation


Landowners adopt new conservation practices if thepractices seem to be in their best interests. However,disagreements arise when the question, why don’tlandowners adopt new conservation practices, such asresidue management systems, is asked. Strategies topromote the adoption of new conservation practicesmust take the answer into account to help landownersmake decisions that are economically, agronomically,and environmentally sound. It can serve as the basisfor increasing adoption. Understanding why landown-ers refuse to adopt new practices is central to develop-ing appropriate information to help them make in-formed decisions.

610.0301 Reasons for non-adoption

Landowners do not adopt conservation technologiesfor two basic reasons: they are either unable or unwill-ing. These reasons are not always easily distinguish-able from one another. Landowners can be able, yetunwilling; willing, but unable; and, of course, bothunable and unwilling. These may sound like minordistinctions, but the difference between a landownerbeing unwilling or unable is crucial when designingthe appropriate conservation adoption strategy.

(a) Unable to adopt

Being unable to adopt a new conservation practiceimplies that some obstacle or situation causes thedecision not to adopt to be rational and correct. Thelandowner is making a sound decision in rejecting aconservation practice because of this obstacle. Theimportant point is that the landowner may be willingto adopt the practices, but for one or more reasons isunable to make this decision. Among those reasonsare:

• Information is lacking or scarce.• Costs of obtaining information are too high.• Complexity of the practice is too great.• A conservation practice is too expensive.• Labor requirements considered are excessive.• Planning horizon is too short.• Availability and accessibility of supporting re-

sources are limited.• Managerial skills are inadequate.• Control over the adoption decision is limited or

nonexistent.

Information is lacking or scarce—A landownermay be unable to adopt a practice because some of thebasic information necessary for a sound economic andagronomic analysis is missing.

Costs of obtaining information are too high—

The time, expense, and difficulty of obtaining site-specific information may be too high. Obtaining rel-evant information is not cost-free to the landowner.


Why Landowners Adopt ConservationChapter 3


Complexity of the practice is too great—Animportant characteristic of any new technology is itssimplicity or ease of use. Extensive research literatureis available showing that the complexity of a technol-ogy is inversely related to the rate and degree of adop-tion. Conservation practices that are too complexmake some landowners unable to adopt this technol-ogy.

Conservation practice is too expensive—Invest-ment costs and influence on net returns are majorconcerns of today's landowners. Designing a practicethat is agronomically sound, but has too high of a pricetag makes many landowners unable to adopt.

Labor requirements considered are excessive—

Land, labor, and capital still determine the nature ofthe farm or ranch. If the labor requirements associatedwith a new conservation practice are thought to be toohigh or relative to the capabilities of the farm or ranch,then the farm or ranch manager will be unable toadopt the technology.

Planning horizon is too short—Conservationpractices may be rejected by a landowner because ofthe current planning horizon relative to the time asso-ciated with recouping initial investments, learningcosts, or depreciation of the present equipment line.Many of today’s landowners may not be farming orranching in a few years because of retirement or othertransitional forces. Asking them to make a long-terminvestment within the context of a short planninghorizon will result in them being unable to adopt.

Availability and accessibility of supporting

resources are limited—Few landowners adoptinnovative conservation management systems withoutsignificant support. This support can be in differentforms.

• Local equipment or agrichemical dealers willingto take the risk of investing in products notcurrently being used in their trade areas.

• Other landowners using conservation practiceswho are willing to share both successes andfailures.

• U.S. Department of Agriculture information andassistance network capable of answering land-owners questions.

The lack of any one of these could be the obstacle thatcreates a situation where the landowner is unable toadopt.

Managerial skills are inadequate—As in the caseof the physical resource base they manage, diversityamong landowners is tremendous. A dimension of thisdiversity is managerial skill. Too often conservationpractices are designed for the average or above aver-age manager. Local assistance networks are alsooriented to this group because of the performance andevaluation systems used in USDA. Either of these cancreate a situation where landowners with less thanaverage management capabilities receive little or noassistance in building these skills. These landownerswill then make the correct decision in rejecting theconservation practice because they lack the requisitemanagerial skills or the opportunity to develop them.

Control over the adoption decision is limited or

nonexistent—Viewing the landowner as some inde-pendent decisionmaker who calls all the shots iscommon. The landowner, therefore, becomes the focalpoint of most efforts to transfer new technologies. Inmany situations, however, a decision cannot be madewithout the approval of a partner, source of financialcredit, landlord, or some other third party. If theseother interests are not convinced of the merits of anew conservation practice, then the landowner will beunable to adopt.

(b) Being unwilling to adopt

Landowners may be unwilling to adopt a new practice.This implies that they have not been persuaded thatthe technology will work or is appropriate for the farmor ranch operation. This persuasion does not occur forseveral reasons. As in the case of inability to adopt,many of these situations are beyond the landownerscontrol; therefore, making a correct decision in reject-ing the practice. Until the correct form of persuasion isoffered, this will not change.

Landowners may be unwilling to adopt because:• Information conflicts or inconsistency.• Poor applicability and relevance of information.• Conflicts between current conservation goals

and the new technology.• Lack of knowledge on the part of the landowner

or promoter of the conservation practice.


Part 610Conservation PlanningNational Economics Handbook


• Practice is inappropriate for the physical setting.• Practice increases risk of negative outcomes.• Belief in traditional practices.

Information conflicts or inconsistency—Land-owners may be unwilling to adopt a practice becauseof inconsistency or even outright conflicts in theinformation about the practice. Concerned aboutwater quality in a vulnerable area, the landowners mayhear that a particular conservation practice alwaysrequires more pesticides or that another local land-owner claims it requires fewer pesticides. They willoften remain unwilling to adopt until these divergentmessages become more consistent.

Poor applicability and relevance of informa-

tion—To make a sound decision, landowners needinformation that is applicable and relevant to theirfarm or ranch. Data from a neighboring state or evenacross the county line may be judged as not meetinglocal conditions. Until the data are adapted and madeavailable relative to local situations, the landownerwill remain unwilling to adopt.

Conflicts between current conservation goals and the

new technology—New technologies do not always fitinto existing conservation practices and the policycontext in which they operate. In these cases thegeneral expectation is that landowners will adapt theoperation to meet the adoption requirements of thetechnology. This can be contrasted with a situationwhere a flexible technology is designed so that it canbe adapted to fit into a landowner's operation. Land-owners may be unwilling to adopt if they feel that toomuch adaptation is required.

Lack of knowledge on the part of the landowner

or promoter of the conservation practice—Anindividual that has not had the opportunity to learnabout a new practice and a planner that lacks sensitiv-ity to the basic needs of a potential adopter can causea landowner remain unwilling to adopt.

Practice is inappropriate for the physical set-

ting—The landowners may be expected to adopt apractice that is inappropriate for the physical settingof the farm or ranch operation. Potential yield losses,inefficient use of inputs, or even negative environmen-tal impacts can result from this situation. Some land-owners, recognizing this incompatibility, remainunwilling to adopt.

Practice increases risk of negative outcomes—Aconservation practice can increase the probability of anegative outcome in many ways. A relatively wetversus dry year can have many implications for pestcontrol, nutrient amount and placement, and thetiming of tillage operations. Relying on agrichemicalsfor pest control can make the landowner more depen-dent on weather patterns and increase the potentialcosts of rescue operations. The complexity of a prac-tice, importance of the timeliness of operations, andthe interdependence of inputs all can increase per-ceived or real uncertainty and risk. Some landownersare simply unwilling to make major decisions underconditions of uncertainty or where risk is significant.

Belief in traditional practices—Although tradi-tional beliefs and practices in agriculture are oftenscorned, one should not forget that those traditionallandowners continue to survive in today's competitiveenvironment while thousands of their innovative orprogressive neighbors have gone out of business.Some landowners are unwilling to change becausethose traditional practices present the least risk indynamic agricultural markets.

(c) Using decisionmaking infor-mation

A way to use knowledge about landowner decision-making is to use a 2 x 2 matrix format (table 3-1).Landowners reasons for adopting or rejecting agricul-tural practices can be categorized into one of the fourcells.




Initially the specific group of landowners (targetgroups) whose cooperation is required for a particularprogram or project needs to be identified. For eachtarget group an assessment is made of the reasonsthey are able or unable and willing or unwilling toadopt the recommended conservation practices. Basedon each group's reasons for adopting or rejecting arecommended practice, target groups are sorted intothe cell that best represents their decisionmakingrationale. These reasons for adoption or rejection canbe determined by interviews with key informants,focus group discussions, NRCS personnel, or othersuch methods. State social science coordinators andthe Agency sociologists can assist with this task.Examples of different target populations and differentconservation practices are provided in tables 3-1through 3-3. Table 3-4 can be adapted for a particularsituation.

Using the matrix to organize target group's reasons foradopting or rejecting NRCS recommendations canassist state office planners and field office personnelin determining the appropriate actions necessary toimplement a successful program or project. Matrixprovided by Tom Makowski, former sociologist withNRCS.

(d) Example: Matrices

The following matrices summarize all the variouscombinations of landowner's reasons for adoption andrejection of new practices and technologies. Threesample matrices are presented, and a blank matrix isprovided. The table can be read across each row ordown each column. For example, in the first table forLow Initial Cost Systems, if the landowner has neverheard of a low initial cost system from NRCS, but hasa history of adopting conservation innovations, thenthat landowner would fit into the category of beingunable and willing.

Identifying the category an individual landowner fallsinto should help the conservation planner tailor aconservation adoption strategy to the needs andconcerns of that particular landowner. Realization ofthe landowner's reasons for adoption or rejectionshould enable the conservation planner to avoidignorance of and insensitivity to the landowner'sneeds, and help get more conservation on the land.

610.0302 Observationsabout adoption

(This section was adapted from an article titled

“Farmer Adoption of Production Technologies” writ-

ten by Pete Nowak, a professor in the Department of

Rural Sociology, University of Wisconsin at Madi-

son.)

At least three general observations can be made fromthe lists presented in this section about why landown-ers are unable or unwilling to adopt conservationpractices. First, increasing the adoption of conserva-tion practices or any other new technology dependsupon addressing reasons why landowners are unableor unwilling to adopt, and then removing these impedi-ments.

Second, many of the factors causing landowners to beunable or unwilling to adopt are beyond their control.In many cases it is not so much the landowners failureas it is a system failure.

Third, broad-scale use of any one or even several ofthe remedial strategies suggested is doomed to failure.A shotgun approach to using technical, financial, oreducational assistance seldom is the answer. Thespecific type of assistance the landowner needs mustbe delivered in a format compatible with their capabili-ties.

The promotional strategies that worked for the earlyadopters generally are not as effective with late adopt-ers. If accelerated rates of adoption for conservationsystems are wanted, then NRCS personnel must be aswilling to accept new ideas and methods as theyexpect potential adopters to be of new practices.




Table 3-1 Low initial cost systems (LICS)

Reasons for landowner adoption and rejection of new practices and technologies

Landowner is Unable Able

Unable 1 Able 2

The landowner has never The landowner was assistedheard of a LICS from NRCS, but… by the NRCS field office in

planning LICS

WillingWilling Willing

has a history of adopting and a LICS will meet theconservation innovations landowner's needs on leased

land

Unable 3 Able 4

No one in the county who can A medium-sized, stablehelp the landowner implement operation, the landownera LICS… has heard of LICS, but…

UnwillingUnwilling Unwilling

and, thus far, a LICS seems no has heard conflicting inform-better than doing nothing. ation about the effectiveness

of LICS.




Table 3-2 Crop residue management (CRM)



Unable 1 Able 2

Landowner cannot get information Landowner has tried CRMor assistance on CRM appropriate on a limited basis and...to his operation, but…

WillingWilling Willing

has a plan that requires CRM can fit it into currentand continues to receive base cropping rotation.payments.

Unable 3 Able 4

First heard of CRM when plan NRCS district conservationistwas signed and never before used has offered to assist theanything but a mold board plow. landowner implement

CRM on the land, but…


The landowner is suspicious of The landowner is afraid ofgovernment assistance and is changing the way the fieldsrelatively isolated from mainstream have always been prepare.agriculture.




Table 3-3 Agroforestry—Windbreak technologies



Unable 1 Able 2

An eastern Colorado landuser Field office staff has informa-has no local source from which tion and the ability to assistto obtain stock, but… landusers plan a windbreak

planting, and

Willing

Willing Willing

the landuser grew up in Missouri several landusers recently req-and wants trees on his land. tec a forest stewardship work-

shop in their county.

Unable 3 Able 4

The landuser has never planted The county has a total treea tree in his life and... care program, but…


conventional wisdom is that the landowner doesn't see howtrees can't grow here; "Never trees will improve either thehave. Never will." efficiency or effectiveness of

the operation.




Table 3-4 Worksheet



Unable 1 Able 2

Willing

Willing Willing

Unable 3 Able 4

Unwilling

Unwilling Unwilling


Chapter 4 Time and Money



(b) The time value of money .............................................................................. 4–1

(c) Opportunity costs ......................................................................................... 4–1

610.0401 Timing 4–2

(a) One-time values, annuities, and lags .......................................................... 4–2

(b) Average annual values .................................................................................. 4–2

610.0402 Interest 4–5



610.0403 Calculating interest and annuities 4–7

(a) Present value of 1 .......................................................................................... 4–7

(b) Amortization .................................................................................................. 4–7


(d) Present value of an annuity of 1 per year ................................................ 4–10

(e) Amount of an annuity of 1 per year .......................................................... 4–10

(f) Sinking fund ................................................................................................. 4–11

(g) Present value of an increasing annuity .................................................... 4–11

(h) Present value of a decreasing annuity ...................................................... 4–12

Tables Table 4–1 Examples of one-time values, annuities, and 4–2

lagged values

Table 4–3 Annual loan payment activity during a 10-year period 4–4


Time and MoneyChapter 4

4–ii (200-vi, NREH, draft, June 2001)

Figures Figure 4–1 Simple interest 4–5

Figure 4–2 Compound interest 4–6

Figure 4–3 Value of 1 4–7

Figure 4–4 Amortization 4–8

Figure 4–5 Amortization key 4–9

Figure 4–6 Sinking fund 4–11

Figure 4–7 Present value of an increasing annuity 4–12

Figure 4–8 Present value of a decreasing annuity 4–13


Chapter 4 Time and Money(Interest and Annuities)



During the decisionmaking process, the landowneroccasionally wants more detailed information than thefirst or second level of analysis provides. In caseswhere investment and return information is required,the conservationist needs a basic understanding ofinterest and annuities to perform an indepth analysisand comparison of alternatives available.

The intent of this chapter is to provide a basic under-standing of more detailed concepts, such as interestand annuities, and to show how they can be used tocompare and analyze alternatives. The interest andannuity factors needed for these calculations appearwith the examples and in appendix A. The state econo-mist can help locate the tables for other interest ratesif needed. This chapter also gives formulas and ex-amples for calculating the factors. For practice ex-amples, consult appendix A. Finally, spreadsheetsoftware programs have functions for many of theformulas.

(b) The time value of money

Money can be invested and used to make more moneyover time. Thus, $1 received today could be put in abank or invested, where it would become worth morethan $1 a year from now. This is known as the timevalue of money. Landowners may decide to purchaseone piece of equipment versus another or to make nopurchase at all, based upon the use of money overtime.

(c) Opportunity costs

The time value of money can be thought of in twoforms. First, if the landowner borrows money for apurchase, the time value of money is the interest paidon the loan. When landowners use their own money,the time value is the return they gave up from anotherinvestment (savings account, certificate of deposit,IRA) by making the purchase.

When a landowner considers purchasing conservation,the time value of money concept applies. A cost aboveand beyond the purchase of the conservation practicemust be considered. If the landowner borrows to payfor the practice, that additional cost will be equal tothe interest that must be paid on the loan. Otherwise,the additional cost is equal to the return that moneywould have earned on some other investment.


Time and Money

(Interest and Annuities)

Chapter 4


610.0401 Timing

(a) One-time values, annuities,and lags

The benefits and costs of conservation do not neces-sarily occur at the same time. Certain costs and ben-efits may occur at one point in time while others occurover a number of years.

Those values that occur at a single point in time, suchas installation costs, are called one-time values. Val-ues that occur over an extended period are calledannual flows, or annuities. Annuities can be general-ized as constant, decreasing, or increasing over time,depending on their characteristics. Many of the ben-efits from conservation occur as annuities. A one-timevalue can occur today or at some point in the future. Ifit occurs at some point in the future, it is delayed orlagged. Annuities can also be lagged. If benefits from aterrace do not start until a year after installation, thenthose benefits are said to be lagged 1 year. Deferredgrazing following range seeding is another commonexample of a lagged annuity.

(b) Average annual values

To properly compare benefits and costs, the sametimeframe must be considered. A standard form inwhich they can be considered is average annual val-ues, which describes an annual flow that is not lagged.In table 4–1, the middle column gives four examples.

Average annual values are significant because theaccounting system in most businesses, includingfarming and ranching, is based on them. Therefore, thecosts and benefits of conservation, once converted toaverage annual values, can be added to the annualcosts and returns of the farm or ranch business.

Useful tools for converting the benefits and costs ofconservation into average annual values are the amor-tization key and the interest and annuity (I&A) tables.(See the NRCS Field Office Technical Guide (FOTG),section 1, appendix A, or the state economist.)

The conversion of costs and benefits into averageannual values without the help of I&A tables wouldinvolve the use of many calculations and much time.The tables were constructed to simplify the process bypresenting coefficients developed from the formulas,thus providing much simpler and faster calculations.Formulas and examples are provided.

The interest and annuity (I&A) tables are used inbenefit-cost analysis when benefits are delayed for asignificant period after costs are incurred; when ben-efits are not constant over the evaluation period; andwhen costs, expressed as capital or principal amounts,must be converted to an average annual cost. Theconversion of costs and benefits of conservation toaverage annual equivalents without the help of I&Atables would involve the use of many difficult formulasand calculations. The tables were constructed tosimplify the process by presenting coefficients devel-oped from the formulas for use in much simpler calcu-lations. A typical table that NRCS uses has nine col-umns:

• Periods• Future value of 1• Present value of 1• Future value of annuity of 1• Amount of annuity for future value• Present value of an annuity of 1• Amount of annuity for a present value• Present value of an increasing annuity• Present value of a decreasing annuity

Table 4–2 presents the interest and annuity table forthe 10 percent interest rate used in the followingexamples.

Table 4–1 Examples of one-time values, annuities, andlagged values

One-time values Annuities Lagged values(Avg. Annual Values)

Installation cost Replacement costs Conservationbenefits, aver-age returns,average costs

O&M costs Replacement costs Any value notstarting thisyear



Time and Money


Chapter 4


Time and Money


Chapter 4


Number of periods hence is the number of years inwhich calculations are considered. Several factorsmay influence this determination including conserva-tion measures may have a short or long useful life oran individual may want to recover their costs in acertain period. Three items described in detail, but notfound directly in the tables are simple interest, com-pound interest, and sinking fund (table 4–3).

Table 4–3 Annual loan payment activity during a 10-year period

Amount Annual Payment RemainingYear of loan payment Principal Interest Balance

1 $7000.00 $1139.25 $439.25 $700.00 $6560.75

2 6560.75 1139.25 483.17 656.08 6077.58

3 6077.58 1139.25 531.49 607.76 5546.09

4 5546.09 1139.25 584.64 554.61 4961.45

5 4961.45 1139.25 643.11 496.14 4318.34

6 4318.34 1139.25 707.42 431.83 3610.92

7 3610.92 1139.25 778.16 361.09 2832.76

8 2832.76 1139.25 855.97 283.28 1976.79

9 1976.79 1139.25 941.57 197.68 1035.22

10 1035.22 1139.25 1035.73 103.52 0

Total — $11392.50 $7000.00 $4392.50 —



Time and Money


Chapter 4

610.0402 Interest

Interest is the earning power of money; what someonewill pay you for the use of your money, or the rent youare willing to pay for the use of someone else’s money.Interest is usually expressed as an annual percentagerate (APR) and is most often compounded.

(a) Simple interest

Simple interest is money paid or received for the useof money, generally calculated over a base period of 1year at a set interest rate, but is not commonly used.Figure 4–1 graphs simple interest.

I p i n= ( )( )( )

where:I = interestp = principali = rate of interestn = number of periods (years)

Example: $7,000 is borrowed at 10 percent interest(APR) for 1 year. Use the interest formula to computehow much money will be needed to pay off this loanwhen it is due.

I = × × =7 000 10 1 700

7 000

, .

,

interest due

principal due

$7,700 Total needed to pay the loan

Example: To determine how much interest is earnedif $3,000 is put into a savings account for 6 months at10 percent interest, multiply the principal times theinterest times the number of years.

I = × × =3 000 10 5 150, . . $ will be earned

(b) Compound interest

Compound interest is earned for one period and imme-diately added to the principal, thus resulting in a largerprincipal on which interest is computed for the subse-quent period.

CI in

= +( )1

where:CI = compound interestn = number of periodsi = periodic rate of interest1 = one dollar since the formula results in a

factor that is multiplied by the principaldollar amount.

If the interest rate is 10 percent (APR) compoundedquarterly for 5 years, then i = .10 divided by 4 (fourpayments in a year) or .025; n = 5 x 4 (four paymentsin a year) or 20. The factor to be multiplied by theprincipal amount is (1 +. 025)20 = 1.63862.

Example: At the end of 7 years, the depositor willhave $4,871.79 if $2,500 is put into a savings accountpaying 10 percent interest compounded annually.

1 10 1 948721 94872 2 500 4 871 80

7+( ) =

× =. .

. , $ , .

If compounded semiannually:

1 05 1 979931 97993 2 500 4 949 83

14+( ) =

× =. .

. , $ , .

If compounded quarterly:

1 11 025 1 996501 99650 2 500 4 991 25

28+( ) =

× =. .

. , $ , .

If compounded monthly:

1 00833 2 007912 00791 2 500 5 019 78

84+( ) =

× =. .

. , $ , .

Figure 4–1 Simple interest

$8,000 $7,700$7,000

$6,000

$4,000

$2,000

00 Years

Principal (P)

Interest (I)

Simple interest


Time and Money


Chapter 4


If compounded daily:

1 00027 2 013702 01370 2 500 5 034 25

2555+( ) =

× =. .

. , $ , .

For comparative purposes, compounding gives theseresults: $2,500 invested for 7 years at 10 percent:

Compounded annually $4,871.79Compounded semiannually $4,949.83Compounded quarterly $4,991.24Compounded monthly $5,019.79Compounded daily $5,034.25

Compound interest factors are not shown by columnheading in the tables. However, the same answer canbe obtained by dividing by the appropriate presentvalue of 1 factor, since the present value of 1 factor isthe reciprocal of the compound interest factor. Sincethese are annual tables, this method will work only ifcompounding on an annual basis.

Example: $2,500 in 7 years will be worth $4,871.78 if itearns 10 percent interest compounded annually.

1/.51316 (from the interest tables, present value of 1, 7years hence at 10 percent) = 1.94871 (the same factorwas obtained by using the formula).

1 94871 2 500 4 871 78. $ , $ , .× =

Compound interest is shown in graph form in figure4–2.

Figure 4–2 Compound interest

Years0

$ 0

$2,500.00

1

P$2,500.00

P$2,750.00

P$3,025.00

P$3,327.50

P$3,660.25

P$4,026.27

P$4,428.90

I$ 250.00

I$ 275.00

I$ 302.50

I$ 332.75

I$ 366.02

I$ 402.63

I$ 442.89

2 3 4 5 6 7

$ 444.894,428.90

$4,871.79



Time and Money


Chapter 4

610.0403 Calculatinginterest and annuities

(a) Present value of 1

The present value of 1 is the amount that must beinvested now at compound interest to have a value of1 at the end of a given period. Put another way, it iswhat $ 1.00 due in the future is worth today. It is alsoknown as the present worth of one or discount factor.

PVi

n=

+( )1

1

where:PV = present valuei = interest raten = years

The present value of 1 factor is the reciprocal of thecompound interest factor.

Example: $4,000 will be needed 5 years from now.You would need to invest $2,483.68 now at 10 percentinterest compounded annually to be worth $4,000 in 5years. The graph is shown in figure 4–3.

1

1 10

11 61051

62092

62092 4 000 2 483 68

5+( )

= =

× =

..

. , $ , .

The factor can also be found in the 10 percent interesttable in the present value of 1 column for 5 yearshence.

Example: If $923 is invested at 10 percent interestcompounded annually and left alone for 25 years, itwould have a value of $10,000 at the end of the 25years (the power of compounding), or $10,000 to bereceived in 25 years is worth $923 today.

. $ , $09230 10 000 923 (from the table) × =

(b) Amortization

Amortization is also called partial payment or thecapital recovery factor. The amortization factor deter-mines what annual payment must be made to pay offthe principle and interest over a given number of years(average annual cost).

Ai i

i

n

n

n

= +( )+( ) −

( )

1

1 1 or

i

1 -1

1+i

The factor is also shown in the 10 percent interesttable in the amortization column for 10 years hence.

Example: A farmer borrows $7,000 to install a conser-vation system. The interest rate is 10 percent, and therepayment schedule is set up for 10 years. The farmermust pay $1,139.25 each year for 10 years to pay offthe $7,000 loan and interest. A total of $11,392.50 willhave been paid to close out this loan ($7,000 of princi-pal and $4,392.50 of interest).

11

1 10

101 38554

1061443

16275

16275 7 000 1 139 25

1010

. ..

..

.

. $ , $ , .

−+( )

=−

= =

× =

Table 4–2 displays annual loan payment activity duringthe 10-year period.

Figure 4–4 illustrates amortization. The amortizationfactor is the reciprocal of the present value of anannuity of 1 per year factor, which means that thesame answer can be obtained by dividing by thepresent value of an annuity of 1 per year factor. Usingthe above problem, the solution is:

7 000614457

1 139 22,

.$ , .=

Figure 4–3 Value of 1

$4,000

$2,483.68

$4,000

$3,000

$2,000

$1,000

00 1 2 3 4 5

Years

P$2,483.68

I$1,516.32

Present value of one


Time and Money


Chapter 4


(c) Amortization key

Many plant sciences or botany courses use a toolcalled a key to identify plant species. This key helpsthe observer to answer a series of question. It is usefulbecause it allows nonexperts to identify species ofplants that are unknown to them. By answering aseries of questions, the amortization key serves as aguide for using the interest and annuity tables toconvert benefits and costs of conservation to averageannual values. The amortization key is illustrated infigure 4–5.

The first question on the key is whether the value is anannuity, such as benefits from a terrace that occurregularly over time, or a one-time value, such as ter-race installation costs. If it happens to be a one-timevalue, follow down the key to the question: Is itlagged? A value that will be realized sometime in thefuture is considered lagged because there is a lagperiod between now and the time the value will occur.Assuming the value is not lagged, only the value overthe life of the project or evaluation period needs to beamortize.

A one-time value is amortized when it is multiplied bythe amortization factor (see the I&A tables in appendixA). The result of this multiplication is an averageannual value. Had the value been lagged, the one-timevalue would first be multiplied by the present value of1 factor for the lag period and then multiplied by theamortization factor.

To convert an annuity to an average annual value, firstdetermine if it is constant, increasing, or decreasing. Ifthe annuity is a constant flow of value, then it shouldbe multiplied by the present value of a constant annu-ity factor for the period (number of years) of theannuity. This factor is in the I&A tables under thecolumn called Present value of an annuity of 1 peryear.

The result would then be multiplied by the amortiza-tion factor if the annuity was not lagged. If the annuityperiod were lagged, it would be multiplied by thepresent value of 1 factor for the lag period beforebeing amortized.

Figure 4–4 Amortization

$6,000

$7,000

$4,000

$2,000

$ 00 1 2 3 4 5

Years

6 7 8 9 10

$1,139.25 $1,139.25 $1,139.25 $1,139.25 $1,139.25 $1,139.25

Amortizaton

$1,139.25 $1,139.25 $1,139.25 $1,139.25



Time and Money


Chapter 4

Figure 4–5 Amortization key

Step 1

Step 2

Step 3

What type of value ist it?

One time valueAnnuity (over time)

What type of annuity is it

Constant Increasing Decreasing

Presentvalue of

constant annuityover life of

annuity

Presentvalue of

increasing annuityover life of

annuity

Is it lagged

PV of 1over lag period

Presentvalue of

increasing annuityover life of

annuity

Yes No

Amortizeover life of project

Average annual value


Time and Money


Chapter 4


For an increasing or decreasing annuity, the valuemultiplied by the factor is the yearly average increaseor decrease. For example, with an increasing annuitythat begins at zero and rises to $500 after 5 years, theyearly average increase would be 500 divided by 5, or100. That value would be multiplied by the presentvalue of an increasing annuity factor for 5 years. To doso, locate the factor in the 5-year row under thePresent value of an increasing annuity column andmultiply it by 100. If the annuity is lagged, that answeris multiplied by the present value of 1 factor over thelag period. It is simply amortized if the annuity beginsin the first year. The same steps would be taken for adecreasing annuity using the appropriate factors.

The three basic steps in the process are:Step 1 Convert annuities to one-time valuesStep 2 Adjust for lagsStep 3 Amortize

Not all the steps are used each time. The key guidesyou through the proper process. For example, if a one-time value is considered, the key moves you past step1. If the annuity or one time value is not lagged, thekey moves you past step 2. This process is necessaryto convert benefits and costs of conservation intovalues that can be easily incorporated into alandowner’s records and decisionmaking system.

(d) Present value of an annuity of1 per year

Present value of an annuity (PV of A) of 1 per year isalso referred to as a constant annuity, present worth ofan annuity, or capitalization factor.

This factor represents the present value or worth of aseries of equal payments or deposits over a periodshows what an annual deposit of $1 is worth today. If afixed sum is to be deposited or earned annually for nyears, this factor will determine the present worth ofthose deposits or earnings.

PVi

i i

n

n of A = +( ) −

+( )1 1

1

Example: You want to provide someone with $1,200each year for 10 years. The interest rate is 10 percent.You must deposit $7,373.48 now to produce an annuityof $1,200 for 10 years, and a total of $12,000 will bereceived. The interest amounts to $4,626.52.

1 10 1

10 1 10

1 10 1

10 2 59374

1 59374259374

6 14457

6 14457 1 200 7 373 48

10

10

10+( ) −

+( )= +( ) −

( ) = =

× =. . .

..

.

. , $ , .

The factor is also in the 10 percent interest table in thePresent value of an annuity of 1 per year column for 10years hence.

The present value of an annuity factor is the reciprocalof the amortization factor. Therefore, the same answercan be obtained by dividing by the amortization factoras follows:

1 20016275

7 373 27,

., .=

(e) Amount of an annuity of 1 peryear

The amount of an annuity of one per year (A of $1) isthe amount that an investment of $1 per year willaccumulate over a certain period at compound inter-est.

Aii

n

of $1 per year = +( ) −1 1

Example: $2,000 per year will be invested for 30 yearsin an individual retirement account (IRA) paying 10percent interest compounded annually. The value ofthe IRA account at the end of 30 years is $328,988.04.

1 10 11

16 4494010

164 49402

164 49402 2 000 328 988 04

30+( ) − = =

× =

..

..

.

. , $ , .

The factor is also in the 10 percent interest table in theAmount of an annuity of 1 per year column for 30years hence.



Time and Money


Chapter 4

(f) Sinking fund

The sinking fund (SF) factor is used to determine whatsize annual deposit is necessary for accumulation of acertain amount of money in a certain number of yearsat various rates of compound interest.

SFi

in

=+( ) −1 1

Example: $6,300 will be needed in 4 years. Theamount, $1,357.46, must be deposited annually for 4years at 10 percent interest compounded annually toaccumulate the $6,300.

.

.

..

.

. , $ , .

10

1 10 1

104641

21547

21547 6 300 1 357 46

4+( ) −

= =

× =

The sinking fund factor is not shown in the tables, butthe same answer can be obtained by dividing by theappropriate amount of an annuity of 1 per year factor.This is because the amount of an annuity of 1 per yearfactor is the reciprocal of the sinking fund factor.

6 3004 64100

1 357 46,

.$ , .=

The sinking fund factor is also equal to the amortiza-tion factor minus the interest rate.

. . .

. $ , $ , .

31547 10 21547

21547 6 300 1 357 46

− =× =

Figure 4–6 depicts the annual deposit required torealize $6,300 within 4 years.

(g) Present value of an increasingannuity

The present value (PV of IA) of an increasing annuityis a measure of present value of an annuity that is notconstant, but increases uniformly over a period. Whenusing this factor, note that the value of $1 (which ismultiplied by the factor) is the annual rate of increaseand not the total increase during the period. This isshown in figure 4–7.

PV IAi i n i

i i

n

n of = +( ) − +( ) − ( )

+( ) ( )

+1 1

1

1

2

Figure 4–6 Sinking fund

$6,000

$8,000

$4,000

$6,300

$2,000

$ 00 1 2 3

Years

4

$1,357.46 $1,357.46 $1,357.46 $1,357.46

Sinking fund


Time and Money


Chapter 4


Example: A farmer renovates a pasture and estimatesthat it will reach full production in 4 years. Tbe im-provement will increase uniformly over the 4-yearperiod and at full production will improve net income$20 per year per acre. Using an interest rate of 10percent, the present value of this increasing annuity is7.54798.

1 10 1 10 4 10

1 10 10

1 61050 1 1 41 46410 01

11051014641

7 54798

5

4 2

+( ) − +( ) − ( )+( ) ( )

= − −×

=

. . .

. .

. .. .

..

.

The annual rate of increase needs to be determined.The annual rate of increase is $20 divided by 4 or $5.This is not to say that the annuity is constant or thesame each year, but that the landowner will receiveincome of $5 the first year, $10 the second, $15 thethird, and $20 the fourth (uniform increases of $5 peryear). The present value of this increasing annuity orincome stream is 7.54798 x $5 or $37.74. If you depos-ited $37.74 in an account paying 10 percent interest

compounded annually, you could withdraw $5 at theend of year one, $10 at the end of year two, $15 at theend of year three, and $20 at the end of year four, andthere would then be a balance of $0.00.

This factor is also in the 10 percent interest tables inthe Present value of an increasing annuity column for4 years hence.

(h) Present value of a decreasingannuity

The present value of a decreasing annuity (PV of DI)factor is used to determine how much something ispresently worth that will provide an annuity thatdecreases uniformly each year. Note that the value of$1 (which is multiplied by the factor) is the annual rateof decrease and not the total decrease during theperiod.

PV

n ii

i

n

of DI =

( ) − ++( )

( )

11

12

Figure 4–7 Present value of an increasing annuity

$316,000

$320,000

$324,000

$328,000

$330,000$328,988.04

$312,000

$ 6,000

$ 4,000

$ 2,000$ 0

0 5 10 15

Years

20 25 30

$2,000 invested each year for 30 years at 10% interest

An annuity of one per year



Time and Money


Chapter 4

Example: A gravel pit is producing $28,000 incomeannually. Because of a decreasing supply that is morecostly to remove, income will drop at a steady rateuntil it equals zero in 7 years. At 10 percent interest,the present value of the gravel is determined by usingthe factor 21.31581. Calculate the factor as follows:

7 10 11

1 10

10

31

1 101

3 5131601

21315801

21 31581

7

2

7

..

.

..

.

. ..

..

.

( ) − ++( )

( )=

− +

+ = =

The factor is in the 10 percent interest table in thePresent value of a decreasing annuity column for 7years hence. See appendix A.

The next step is to determine the annual rate of de-crease, which equals $28,000 divided by 7, or $4,000.00.The annuity is not constant or the same each year. The

landowner will receive income of $28,000 the firstyear, $24,000 the second, $20,000 the third, until thesupply runs out on the seventh year and becomes$0.00. Finally, the present value of this decreasingannuity is the factor times the annual rate of decrease(21.31581 x $4,000) or $85,263.24. This is the amountthat would need to be deposited now to produce theidentified decreasing annuity.

(i) Rule of 72

This shortcut method allows you perform severalinterest and annuity calculations. The rule of 72 statesthat 72 divided by the interest rate received will resultin the number of years it will take to double yourmoney at compound interest.

Example: To compute how long it takes to double aninvestment of $150 at 8 percent compound interest,divide 72 by 8.

728

9= years

Figure 4–8 Present value of a decreasing annuity

$60,000

$80,000

$85,263.24

$40,000

$20,000

$ 00 1 2 3 4 5

Years

6 7

$28,000 $24,000 $20,000 $16,000 $12,000

Present value of a decreasing annuity

$ 4,000

$ 8,000


Time and Money


Chapter 4


Using the I&A tables, you can check the calculation. Ifyou want to determine the PV of one, 9 years hence, at8 percent, the factor to use is .50025.

. $ $

.

50025 300 150

15050025

300

× =

=

Dividing 72 by the number of years you want to doubleyour money gives you the interest rate you need.

Example: To compute the interest rate needed todouble $150 in 9 years, divide 72 by 9.

729

8= %

Compound interest factors are not shown by columnheading in the I&A tables. Calculate such factors bydividing by the appropriate present value of 1 factor(.50025 in the example) since the present value of 1factor is the reciprocal of the compound interestfactor. Note that this method works only if compound-ing on an annual basis, because the I&A tables areannual tables.

15050025

300.

=


Chapter 5 Evaluation Techniques


610.0501 Partial budgeting 5–1

(a) Method ........................................................................................................... 5–1

(b) Example ......................................................................................................... 5–1

610.0502 Break-even analysis 5–3

(a) Method ........................................................................................................... 5–3

(b) Example ......................................................................................................... 5–3

610.0503 Cost and Price Indexes 5–7

(a) Inflation .......................................................................................................... 5–7

(b) Commonly used indexes .............................................................................. 5–7

610.0504 Cost effectiveness 5–14

(a) Method ......................................................................................................... 5–14

610.0505 Marginal analysis 5–14

(a) Method ......................................................................................................... 5–14

610.0506 Conservation Effects for Decisionmaking 5–17

(a) Introduction ................................................................................................. 5–17

610.0507 Economic Thresholds 5–19

(a) Economic Threshold - Insecticides .......................................................... 5–19


Evaluation TechniquesChapter 5

5–ii (200-vi, NREH, draft, June 2001)

Figures Figure 5-1 Partial budget worksheet 5–2

Figure 5-1 Partial budgeting example 5–4

Figure 5-2 Break-even analysis example 5–5

Figure 5-3 Sample problems and solutions 5–6

Figure 5–4 Soybean budget 5–8

Figure 5-5 Computing average annual cost life cycle cost 5–15

analysis example

Figure 5–6 CED decisionmaking process 5–17

Tables Table 5-1 Prices received by farmers: index numbers by groups 5–10

of commodities and ratio, United States 1975-87 (1977=100)

and 1988-1998 (1990-1992=100)

Table 5-2 Prices paid by farmers: Index numbers by groups of 5–11

commodities, United States, 1975-89 (1977=100) and

1988-98 (1990-92=100)

Table 5-3 Consumer price index, 1982-84=100 5–12

Table 5-4 Construction cost index history, 1906-2000 5–13




In this chapter evaluation techniques and procedures,such as partial budgeting, break-even analysis, andusing an index are described. Evaluation techniquesthat help in integrating economics, into conservationplanning activities are described at a more detailedlevel. This includes cost effectiveness, marginal analy-sis, conservation effects for decisionmaking, andeconomic thresholds.

A useful technical note to consult is The Economics ofNutrient and Pest Management, September 1990:Series 614. If additional help is needed, contact yourstate economist.

610.0501 Partialbudgeting

(a) Method

A partial budget is an orderly and logical method ofestimating what will happen if small changes are madein farm operations. Examples of changes includeadding another crop, switching from alfalfa to pota-toes, or investing in farm storage. Since the changeaffects only certain components, only the cost andincome changes for the affected crops need to beconsidered. Partial budgeting will helps to answersuch questions as:

• How much will the changes cost?• Will income increase as a result of the change?• Will net income change?

(b) Example

The example form (fig. 5–1) shows how to display theinformation. A short example of partial budgeting usedto answer a buy or rent problem is shown in example5–1. A series of questions in appendix B helps inconducting a complex partial budget evaluation. Itprovides the resulting net change in profits, an analy-sis of the answer and how it was estimated, and abasis for deciding about operational changes.




Figure 5-1 Partial budget worksheet

Partial budget

Problem:

Additional costs: $__________ Additional revenue: $__________

Reduced revenue: Reduced costs:_________________________________ $__________ _________________________ $__________

_________________________________ $__________ _________________________ $__________

_________________________________ $__________ _________________________ $__________

_________________________________ $__________ _________________________ $__________

A. Total additional costs B. Total additional revenueand reduced revenue $__________ and reduced costs $__________

$__________

Net change in prof`it (B minus A) $__________




610.0502 Break-evenanalysis

(a) Method

Break-even analysis provides useful information whensmall changes in specific conservation situations arebeing evaluated. This technique can be used to deter-mine how much of an investment can be made basedon the expected returns. Examples of break-evenquestions include:

• How much can I afford to spend?• How long will it take to get my money back?• What rate of return will I receive?• How much net gain do I need?

Each of these questions involve an unknown variable,such as cost, time, interest rate, and change in netreturns, respectively. Each question can be answeredif the other three variables are known. Generally, threeof the following four pieces of information must beavailable to solve for the other:

• Cost—cost of applying the conservation• Time—system life, loan period• Interest rate—producers' borrowing or saving

interest rate• Change in yield or net returns—the difference

created by applying conservation

(b) Example

The problems and solutions in figure 5–2 illustrates thebreak-even analysis process. The examples in figure5–3 provides a better idea of how break-even analysiscan be used. In this example, an opportunity exists todevelop a water source (a spring) and improve grazingdistribution. This will allow the harvest of 30 AUMS inan area where only 10 are harvested at present.




Figure 5-1 Partial budgeting example

Partial budget—Buy or Rent

Problem: A farmer has made a decision to no-till 600 acres. Now the choice is to rent a drill for $7.50 peracre or purchase a new drill. A new drill would cost $24,000, have a salvage value of $4,000, and auseful life of 10 years. The same tractor would be used to pull either drill so there will be nochange in tractor costs. Annual repairs on the drill are estimated at $300, and taxes and insurancewill be about $50 per year. Should the farmer purchase the new drill? (Purchasing would be thechange.)

Solution:Additional costs: $__________ Additional revenue: $__________

Capital recovery (purchase drill) None($24,000 - 4,000) x (amort. factor 10 yr. @ 10%) $3,255

Interest on salvage value$4000 @ 10%/year $400

Taxes and insurance $50Repairs $300

Reduced revenue: Reduced costs:

None Machine rent600 x $7.50 $4,500

A. Total additional costs B. Total additional revenueand reduced revenue $4,005 and reduced costs $4,500

Less A $4,005

Net change in profit (4,500 – 4,005) $495

Buying the new drill is a beneficial change.




Figure 5-2 Break-even analysis example

Break-even cost:

Change in yield x value of yield/unit x proper annuity factor, given years and interest rate = break-evencost

At any cost lower than break-even cost plus cost sharing, the producer will profit from the conservationinvestment

Break-even time:

Conservation cost after cost sharingValue of change in yield

Calculated cost, annuity factor=

Using the appropriate interest rate column, find the time period row which approaches the calculatedannuity factor. This time period is the break-even rate of return; that is, the rate of return needed to break-even on the conservation investment.

Break-even interest rate:

Conservation cost after cost sharingValue of change in yield

Calculated cost, annuity factor=

Using the appropriate time row, find the interest rate that approaches the calculated annuity factor. Thisinterest rate is the break-even rate of return; that is, the rate of return needed to break-even on the conser-vation investment.

Break-even value per unit of yield:

Conservation cost after cost sharingamortization factor for given years and interest rate

change in yield (i.e., 30 bushels, 20 AUMs)×

The conservation investment will pay for itself at any price received greater than the break-even value.




Figure 5-3 Sample problems and solutions

Example 1: Break-even cost

Problem: How much can the cooperator afford to spend for the stock water development if the system life is20 years, the interest rate is 12 percent, and an AUM is valued at $7?

Solution: 20 AUMS (change in yield) x $7 per AUM = $140. $140 x 7.46944 (present value of an annuity of 1per year for 20 years at 12% interest) = $1,045.72.The cooperator's breakeven point is a capital cost of $1,045.72. The cooperator will profit fromstock water development at any cost below the break-even point.

Example 2: Break-even time

Problem: What is the period of capital recovery or minimum life expectancy for the proposal if the capitalcost is $1,000, an 8 percent interest rate is used, and the value of the change in AUMs produced is$120 per year?

Solution: Using the 8 percent compound interest and annuity table, read down the column labeled PV of anannuity of 1 per year to a factor close to 8.333. Read left to the Number of years hence column. Thefactor of 8.333 occurs between 14 and 15 years. The conclusion is that the period of capital recov-ery, or break-even time, is about 15 years.

$ ,.

1 000120

8 333=

Example 3: Break-even interest rate

Problem: What is the break-even interest rate or internal rate of return when capital cost is $1,000, effectsare evaluated over a 20-year period, and the value of the change in AUMs produced is $180 peryear?

Solution: The PV of an annuity of one per year factor for the break-even interest rate is

$ ,.

1 000180

5 555=

Reading across interest tables we find that the PV of an annuity of one per year factor for 20 yearsat 16% interest = 5.92884, 17% interest = 5.62777, and 18% interest = 5.35275. Since the factor for 17percent interest is closest to, but not less than the break-even factor of 5.55556, we conclude thatthe break-even interest rate is slightly greater than 17 percent interest.

Example 4: Break-even value

Problem: What must an AUM be worth to break even when capital cost is $1,400, evaluation is 20 years, andbenefits are discounted at 11 percent interest?

Solution: Given the level of the other variables, an AUM must be worth $8.79 to break even.

$ , . $ .

.$ .

1 400 12558 175 81

175 8120

8 79

× =

=

(amortization factor, 20 years, 11% interest)

per AUM

Note: Farmers may not adopt practices at breakeven levels because of risk and other factors.




610.0503 Cost and PriceIndexes

(a) Inflation

One reason the value of the dollar has constantlychanged in recent history is inflation. Inflation occurswhen the volume of money and credit in an economyincreases faster than the supply of goods, thus drivingup the price of the goods that are available for pur-chase. Even though there is more money, everythingcosts more, so no one really gains. Or do they?

The answer depends on whether increases in income(and expenses) keep pace with the rate of inflation,exceed it, or trail along behind it.

(b) Commonly used indexes

Four of the most commonly used indexes in agricul-tural analyses are Prices Received by Farmers (table5-1), Prices Paid by Farmers (table 5-2), the ConsumerPrice Index (CPI) (table 5-3), and the EngineeringNews Record (ENR) construction cost index (table5-4). The choice of which index to use depends uponthe nature of the numbers you are trying to update. Ingeneral, the indexes for Prices Paid and Prices Re-ceived by Farmers are more specific to agriculturethan the CPI or ENR indexes.

(1) Prices paid and prices received by farmers

Figure 5-4 uses the Prices Paid by Farmers index in toillustrate the procedure for using an index. This proce-dure can be applied to any index. Indexing is a methodof quickly adjusting cost and return information forinflation or deflation over time. Prices Paid by Farm-ers and Prices Received by Farmers indexes are calcu-lated monthly by the National Agricultural StatisticsService (NASS). These indexes are published monthlyand annually in the Agricultural Prices Report byNASS and many State crop and livestock ReportingBoards. The indexes are also published annually in theUnited States Department of Agriculture's AnnualStatistics. The reports that contain the annual sum-mary of indexes of prices received and paid by farm-ers; prices received for farm commodities by states

and prices paid for production items by region and theU.S. Past year and earlier years can be viewed at http://

usda/mannlib.cornell.edu/imports/nassr/price/zap-

bb/.

The indexes published in the Agricultural Statistics for1977 use 1977 for the base year. The base year isexpressed in the index tables as "1977= 100" and ischanged periodically. Indexes are adjusted to a newbase by dividing the prices for all other years into theprices for the selected base year.

Enterprise cost and returns, or crop budgets, may beadjusted over time or updated using price indexes. Theindex of items used in production (all commodities),Prices Paid by Farmers, is the commonly used indexfor total costs in a budget (table 5-1). Total costs maybe broken down, for example, into seed, fertilizer, andmachinery, and the respective individual indexesapplied. The total change in costs resulting from use ofthe aggregate index will be the same as the change incosts resulting from use of the individual indexes,within rounding differences.

Prices Received by Farmer's index (table 5-2) may alsobe used to adjust total returns in crop budgets. How-ever, current prices of the commodity preferablebecause they are usually readily available.

The Consumer Price Index and the Engineering NewsRecord Index can be used in an identical fashion tothat of the Prices Received and Prices Paid indexes.




Figure 5–4 Soybean budget

Given: A soybean budget dated 1987 is available. Current price for soybeans is $5.95.

Soybean budget, 1986.

35 bushels $5.20 = $182

Production cost = 170

Net returns = 12

×

Index of items used in production, from table 5-1:1987 1471988 1571989 165

Problem: Cost and returns for soybeans are needed for 1989.

Solution: To obtain the factor for adjusting 1987 costs to 1989, divide the 1989 index by the 1987 index:

165147

1 1224= .

The 1987 costs are then multiplied by the adjustment factor to get the 1989 adjusted costs:$ . $ .170 1 1224 190 80× =

A 1989 adjusted budget is then constructed, using the current price of soybeans as follows:

35 bushels $5.95 = $208

Adj. production cost = 191

Net returns = 17

×

To obtain an average index for 1987-89 (3 years) average Prices Paid index is:

147 157 1654693

156+ + = =

(This average index may then be used to adjust a base year cost to an average cost for 1987-89. Indexes mayalso be used to adjust budgets for current years to previous years. Except in rare cases, it is recommendedthat the adjustment periods be kept to no more than 5 years, because using indexes to adjust budget costsassumes technology is constant. Indexes measure how much it costs to purchase this hypothetical package ofgoods and services compared to what it was in the base year.)




(2) Consumer price index

A number of indexes can be used to convert costs andother numerical figures from different periods todollars of constant purchasing power. The CPI (table5-3) is commonly used and is appropriate for mostapplications. The conversion process is best explainedwith an example.

Average monthly earnings of a farm laborer in 1909were $21.30. How much would it have taken in 1988 toequal the same purchasing power? Multiply $21.30 bythe CPI for 1988 (118.3), and divide by the CPI for 1909(9.0).

21 30118 3

9279 97.

.$ .× =

(3) Engineering news record index

The ENR index (table 5-4) can be used to convert costinformation from different periods to dollars of con-stant purchasing power. This index is commonly usedto update cost information in watershed plans andsimilar types of projects. Use of this index is identicalto that described for the CPI. Although monthly dataare printed on this table, only annual averages shouldnormally be used in NRCS work. Indexes measurehow much it costs to purchase a hypothetical packageof goods and services, compared to what it was iin thebase year.




Table 5-1 Prices received by farmers: index numbers by groups of commodities and ratio, United States 1975-87(1977=100) and 1988-1998 (1990-1992=100) 1/ 2/

Year Food Feed Cotton Tobac- Oil Fruit Fruit Com/ Com./ Pot., All Meat Dairy Poul- Live- All Ratio 4/

grains grains/ co bear. and for veg. veg. swt. try/ stk/ farmhay crops nuts fresh for pot./ eggs prod. prod.

mkt. 3/ fresh drymkt. edible

beans

1975 155 127 68 93 81 85 84 92 88 108 105 100 90 103 98 101 1131976 129 120 99 93 85 80 80 91 88 104 102 101 100 102 101 102 1071977 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 1001978 122 101 91 109 93 137 144 105 106 104 105 134 109 106 124 115 1061979 147 114 96 118 103 144 151 110 109 92 116 166 124 111 147 132 1071980 165 132 114 124 102 124 128 113 110 129 125 156 135 112 144 134 971981 166 141 111 140 110 130 132 136 135 177 134 150 142 116 143 139 921982 146 120 92 153 88 175 186 126 120 125 121 155 140 110 145 133 841983 148 143 104 155 102 128 131 130 129 123 128 147 140 118 141 135 841984 144 145 108 153 109 202 220 133 133 157 138 151 139 135 146 142 871985 133 122 93 153 84 180 192 129 122 124 120 142 131 119 136 128 791986 109 98 91 138 77 169 177 130 123 114 107 145 129 128 138 123 771987 103 85 99 129 79 181 194 144 147 126 106 163 129 107 146 126 781988 5/ 113 102 95 86 126 96 104 88 96 91 93 98 99 1081989 6/ 127 109 98 96 118 99 103 131 99 94 104 111 104 1081990 100 105 107 97 105 97 102 133 101 105 105 105 104 1051991 94 101 108 102 99 112 100 99 97 101 94 99 99 991992 113 98 88 101 100 99 111 88 102 96 100 97 99 971993 105 99 89 101 108 91 116 107 103 100 98 105 102 981994 119 106 109 101 110 89 109 110 105 90 99 106 98 941995 134 112 128 103 104 97 119 106 106 85 98 107 99 921996 157 146 122 105 128 118 111 114 108 87 114 120 108 981997 128 117 112 104 131 108 122 90 108 114 102 113 105 901998 103 100 107 104 107 110 119 99 108 120 119 117 100 87

1 Source: United States Department of Agriculture, Agricultural Statistics, 1990, page 386.2 The National Agricultural Statistics Service indexes are computed uses the price estimates of averages for all classes and grades for indi-

vidual commodities being sold in local farm markets. In computing the group indexes, prices of individual commodities have been weightedby average quantities sold during 1971-73.

3 Fresh market for noncitrus, and fresh market and processing for citrus.4 Ratio of Index of Prices Received (1977=100) to Index of Prices Paid (1977=100).5 1980-1998 Base weight period 1990-1992=100.6 Numbers changed slightly in versions of data printed as year 94 and year 98 reports.




Tab

le 5

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rice

s pa

id b

y fa

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ndex

num

bers

by

grou

ps o

f co

mm

odit

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Uni

ted

Stat

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975-

89 (

1977

=10

0) a

nd 1

988-

98 (

1990

-92=

100)

1/ 2

/ 3/

Yea

r- -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

Pro

duct

ion

inde

xes

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- - -

- -P

rod.

,C

om.,

Pro

d.F

eed

Live

stk.

Seed

Fer

t.A

g.F

uels

/F

arm

/A

uto/

Tra

c./

Oth

erB

uild

/F

arm

Ren

t 8/

Int.

Tax

esW

age

int.,

int.,

(all

& p

oul.

chem

.en

ergy

4/ s

up.

truc

ksse

lf-m

ach

7/fe

nc.

serv

./ra

tes

5/ta

x,ta

x,co

m.)

rep

.pr

op.

cash

wag

ew

age

mac

h.re

nt 4/

rate

sra

tes

6/

1975

9110

085

9412

010

288

102

8282

8090

8677

8785

8989

1976

9710

397

9210

211

193

100

9494

9594

9288

9493

9595

1977

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

1978

108

9814

010

510

094

105

104

106

109

108

108

107

117

100

107

109

108

1979

125

110

185

110

108

9613

711

511

712

211

911

811

714

310

711

712

512

319

8013

812

317

711

813

410

218

813

412

313

613

212

814

417

411

512

713

913

819

8114

813

416

413

814

411

121

314

714

315

214

613

415

721

112

313

815

115

019

8215

312

216

414

114

411

921

015

215

916

516

013

516

924

212

414

415

715

919

8315

213

416

014

113

712

520

215

217

417

417

113

814

525

012

914

815

916

119

8415

513

515

415

114

312

820

114

718

218

118

013

815

224

813

315

116

116

419

8515

111

615

415

313

512

820

114

619

317

818

313

615

022

813

615

415

616

219

8614

410

815

314

812

412

716

214

419

817

418

213

614

521

113

815

215

015

919

8714

710

317

914

811

812

416

114

520

817

418

513

714

718

914

416

615

116

219

88 5

/90

104

9194

9489

7790

9089

9485

100

8987

9291

1989

9511

093

104

9993

8394

9394

9691

106

9195

9796

1990

9910

310

210

297

9510

096

9796

9996

9610

795

9699

9919

9110

098

102

9910

310

110

410

010

010

010

099

100

100

101

100

100

100

1992

101

9996

9910

010

396

104

102

104

101

103

104

9310

410

510

110

119

9310

399

104

105

9710

792

107

109

106

105

108

100

8810

710

810

210

419

9410

610

595

109

106

110

8811

011

511

310

911

310

892

112

111

107

106

1995

109

104

8211

012

211

591

112

121

121

114

118

116

103

117

113

109

110

1996

115

129

7511

512

511

910

211

511

812

511

511

612

810

611

211

711

511

519

9711

912

594

119

121

121

106

118

119

128

118

116

136

106

115

123

118

118

1998

115

110

8812

211

212

288

119

119

133

118

117

134

109

119

129

116

117

1So

urce

: Uni

ted

Stat

es D

epar

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t of

Agr

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, Agr

icul

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l Sta

tist

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199

0, p

age

386.

(ht

tp://

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.man

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Table 5-3 Consumer price index, 1982-84=100 1/

Year CPI Year CPI Year CPI Year CPI

1900 8.3 1925 17.5 1950 24.1 1975 53.81901 8.3 1926 17.7 1951 26.0 1976 59.91902 8.7 1927 17.3 1952 26.5 1977 60.61903 9.0 1928 17.1 1953 26.7 1978 65.21904 9.0 1929 17.1 1954 26.9 1979 72.61905 9.0 1930 16.7 1955 26.8 1980 82.41906 9.0 1931 15.2 1956 27.2 1981 90.31907 9.3 1932 13.6 1957 28.1 1982 96.51908 9.0 1933 12.9 1958 28.9 1983 99.61909 9.0 1934 13.4 1959 29.1 1984 103.91910 9.3 1935 13.7 1960 29.6 1985 107.61911 9.3 1936 13.8 1961 29.9 1986 109.61912 9.7 1937 14.3 1963 30.2 1987 113.61913 9.9 1938 14.1 1963 30.6 1988 118.31914 10.0 1939 13.9 1964 31.0 1989 124.01915 10.0 1940 14.0 1965 31.5 1990 130.71916 10.9 1941 14.7 1966 32.4 1991 136.21917 12.8 1942 16.3 1967 33.4 1992 140.31918 15.0 1943 17.3 1968 34.8 1993 144.51919 17.3 1944 17.6 1969 36.7 1994 148.21920 20.0 1945 18.0 1970 38.8 1995 152.41921 17.9 1946 19.5 1971 40.5 1996 156.851922 16.7 1947 22.3 1972 41.8 1997 160.521923 17.0 1948 24.1 1973 44.4 1998 163.011924 17.1 1949 23.8 1974 49.3 1999 166.1

2000 169.7 2/

1 Source: Financial Trend Forecaster Homepage (http://www.fintrend.com/html/historical.html).

2 February 2000




Annual average 2/ - - - - - - - - - - - - - - - - - - - - - - - -Monthly construction cost - - - - - - - - - - - - - - - - - - - - - - - - - - - -Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Annual

Yr. AA Yr. AA Yr. AA Yr avg

1906 95 1929 207 1952 569 1975 2103 2128 2128 2135 2164 2205 2248 2274 2275 2293 2292 2297 22121907 101 1930 203 1953 600 1976 2305 2314 2322 2327 2357 2410 2414 2445 2465 2478 2486 2490 24011908 97 1931 181 1954 628 1977 2494 2505 2513 2514 2515 2541 2579 2611 2644 2675 2659 2660 25761909 91 1932 157 1955 660 1978 2672 2681 2693 2698 2733 2753 2821 2829 2851 2851 2861 2869 27761910 96 1933 170 1956 692 1979 2872 2877 2886 2886 2889 2984 3052 3071 3120 3122 3131 3140 30031911 93 1934 198 1957 7241912 91 1935 196 1958 759 1980 3132 3134 3159 3143 3139 3198 3260 3304 3319 3327 3355 3376 32371914 89 1937 235 1960 824 1982 3707 3728 3721 3731 3734 3815 3899 3899 3902 3901 3917 3950 38251915 93 1938 236 1961 847 1983 3960 4001 4006 4001 4003 4073 4108 4132 4142 4127 4133 4110 40661916 130 1939 236 1962 872 1984 4109 4113 4118 4132 4142 4161 4166 4169 4176 4161 4158 4144 41461917 181 1940 242 1963 9011918 189 1941 258 1964 936 1985 4145 4153 4151 4150 4171 4201 4220 4230 4229 4228 4231 4228 41951919 198 1942 276 1965 974 1986 4218 4230 4231 4242 4275 4303 4332 4334 4335 4344 4342 4351 42951920 251 1943 290 1966 1019 1987 4345 4352 4359 4363 4369 4387 4404 4443 4456 4459 4453 4478 44061921 202 1944 299 1967 1074 1988 4470 4473 4484 4489 4493 4525 4532 4542 4535 4555 4567 4568 45191922 174 1945 308 1968 1155 1989 4580 4573 4574 4577 4578 4599 4608 4618 4658 4658 4668 4685 46151923 214 1946 346 1969 12691924 215 1947 413 1970 1381 1990 4680 4685 4691 4693 4707 4732 4734 4752 4774 4771 4787 4777 47321925 207 1948 461 1971 1581 1991 4777 4773 4772 4766 4801 4818 4854 4892 4891 4892 4896 4889 48351926 208 1949 477 1972 1753 1992 4888 4884 4927 4946 4965 4973 4992 5032 5042 5052 5058 5059 49851927 206 1950 510 1973 1895 1993 5071 5070 5106 5167 5262 5260 5252 5230 5255 5264 5278 5310 52101928 207 1951 543 1974 2020 1994 5336 5371 5381 5405 5405 5408 5409 5424 5437 5437 5439 5439 5408

1995 5443 5444 5435 5432 5433 5432 5484 5506 5491 5511 5519 5524 54711996 5523 5532 5537 5550 5572 5597 5617 5652 5683 5719 5740 5744 56201997 5765 5769 5759 5799 5837 5860 5863 5854 5851 5848 5838 5858 58251998 5852 5874 5875 5883 5881 5895 5921 5929 5963 5986 5995 5991 59201999 6000 5992 5986 6008 6006 6039 6076 6091 6128 6134 6127 6127 60602000 6130 6160 6201 6198

1 How ENR builds the index: 200 hours of common labor at the 20-city average of common labor rates, plus 25 cwt of standard structural steelshapes at the mill price, plus 22.56 cwt (1. 128 tons) of portland cement at the 20-city price, plus 1,0888 board-feet of 2 x 6 lumber at the 20-city price.

2 Base: 1913=100. Indexes revised from September 1996 through January 1998 (http://www.enr.com/cost/costcci.asp).

Table 5-4 Construction cost index history, 1906-2000 (Source: Engineering News Record) 1/




610.0504 Costeffectiveness

(a) Method

Cost effectiveness analysis is an appraisal techniqueused when benefits cannot be reasonably measured inmonetary terms. It can be used in two forms:

• The constant effects method, which uses least-cost analysis to determine the alternative formeeting a stated level of benefits, includingintangible ones. (See fig. 5–4.)

• The constant cost method, which calculates thecost per unit of benefit, or the cost effectivenessratio, and requires that means exist for quantify-ing benefits (but not necessarily for attaching amonetary price or economic value to the ben-efits).

If analysis is used to determine the most cost-effective means of production among option technolo-gies, it is most often in the form of the constant effectsmethod and called least-cost analysis. A measure ofproduct worth is impossible to obtain from cost-effectiveness analysis because the analysis is donewithout reference to user value.

610.0505 Marginalanalysis

(a) Method

Marginal analysis is the analysis of the change in onevariable when a small change is made in another. Anexample of its application is the marginal value prod-uct. This is the amount that production is changedwhen a small change is made in input, all other inputsbeing held constant. For instance, one could measurehow different amounts of fertilizer affect wheat pro-duction.

Marginal analysis is an important concept underlyingmost economic analyses. On (or at) the margin refersto a small change in the total of some input or inproduction.




Figure 5-5 Computing average annual cost life cycle cost analysis example

Problem: Determine least costly alternative.

Situation: Two alternatives are being considered to provide pressurized water at a given point: a pumpand motor or a gravity pressurized pipeline, each with a 20-year life expectancy. The installationcost (capital cost) of the pump and motor is estimated to be $5,000, and of the gravity pipeline,$10,000. Average annual operation and maintenance cost for the pump and motor is estimatedto be $1,000, and for the gravity pipeline, $300. The installation and annual operation and main-tenance costs between alternatives are:

Pump and motor: $5,000 + $ 1,000=$6,000Gravity pipeline: $10,000 + $300=$10,300

Questions: When compared over a 20-year life at 20 percent interest, which is the least costly alternative? Ifthe interest rate used is 5 percent, which is least costly? What general conclusions can we drawfrom this example?

Solutions: Compute average annual cost life cycle cost analysis to determining least cost alternative

To determine which option, pump or motor or gravity pipeline, is least costly, the installationand average annual operation and maintenance (O&M) costs of each must be considered on asingle common time base that is frequently used is average annual total cost. An average annualequivalent of the installation cost can be derived by amortizing the one-time installation cost atthe evaluation interest rate over the evaluation period, which is the life expectancy in thisproblem. O&M costs are already calculated on an annual basis. Hence, the total average annualcost can be determined by adding together the average annual equivalent of installation costsand the O&M costs. When average annual total cost at a given interest rate has been determinedfor each option, comparison will reveal which is the least costly means of providing equalservice. It is important to realize and understand that economic comparison of costs to deter-mine the least costly option is only valid when each option provides the same level of service oroutput.

Comparison over 20 years at 20 percent interestAverage Annual Pump and motor Gravity pipeline

installation cost $1,027 2,054(Factor = 0.20536)

Average annual O&M $1,000 300Average annual total cost $2,027 2,354

Conclusion: When compared over 20 years at 20 percent interest, the pump and motor option is less costlythan the gravity pipeline option.

Comparison over 20 years at 5 percent interestAverage Annual Pump and motor Gravity pipeline

installation cost $401 802(Factor = 0.08024)

Average annual O&M $1,000 300Average annual total cost $1,401 $1,102




Figure 5-5 Compute average annual cost life-cycle cost analysis—Continued

Conclusion: When compared over 20 years at 5 percent interest, the gravity pipeline is less costly than thepump and motor option.

General High interest rates tend to push decisionmakers away from higher installation costs inconclusions: favor of higher operation and maintenance costs. Low interest rates tend to do the opposite,

by making one-time installation costs look relatively more favorable than recurring annualoperation and maintenance costs. Viewed from another perspective, high interest rates tendto move decisionmakers away from options that require large and relatively irreversiblecommitments and toward operations with low initial commitment and high flexibility forchange. Low interest rates indicate more expected stability in future economic conditions,and therefore make initial commitment more comfortable for decisionmakers.

An important factor that confounds and partially negates the above conclusions is inflation-ary impact on recurring annual costs. Inflation is one factor that influences the market rate ofinterest. Generally, when high interest rates prevail, higher prices for most goods and ser-vices are expected in the future. If all goods and services increase at the same rate, the statedgeneral conclusions remain valid. However, above average increases in price may occur. Themarket for a particular good adjusts to expected increases in demand or shortages in supply.When high interest rates reflect a differential price increase of a good, that increase is consid-ered price escalation. Expected price escalation must be considered separately from infla-tion, and partially negates the general conclusions as well. Expected price escalation effectson decision making are considered in the next section.




610.0506 ConservationEffects for Decisionmaking

(a) Introduction

(i) Purpose and scope

Conservation Effects for Decisionmaking (CED)enables NRCS planners to display and evaluate theeffects of various conservation options available to theland user.

The CED process can be used to assist land users withtheir conservation decisions by:

• Providing a framework in which to organize andpresent information that facilitates comparisonof the positive (gains) and negative (losses)effects of a conservation option.

• Permitting consideration of all physical, socio-logical, and economic values pertinent to theevaluation.

• Encouraging the employment of analytical toolsat appropriate levels of sophistication to provideinformation.

• Capitalizing on the knowledge and experience ofour agency professionals and clients to fosterinteraction throughout the decisionmakingprocess.

(ii) The planning process

The CED process is completely consistent with theplanning process outlined in the National PlanningProcedures Handbook. CED is not a new system, but amethod of thought organization. It provides a way toevaluate the continuum of all alternatives available tothe land user, and is intended to make conservationplanning and application easier and more efficient.

(iii) Collecting and recording information

The collecting and recording of effects information forthe CED process is not a new approach; it has beenthe major thrust of conservation management systems(CMS), and of planning in general. The CED ideaemerged from a national economic application workgroup. It links the planning process with economicinput and emphasizes the end objective. The identifica-tion of the expected effects from applied conservationallows decisions to be made and actions to be taken.The CED framework is applicable to all NRCS pro-

grams and planning situations. Consequently, it is alsothe theme and organizational tool for this handbook,which has an explanation of the steps in the process ofevaluation, a diagram of the decisionmaking process,and examples of evaluation approaches. Subsequentchapters explain the various economic principles,tools, and techniques available for use if one wishes tocarry evaluations to a more detailed level of analysis.

(iv) The framework

The CED framework has information from manydisciplines combined, so that a comprehensive andeffective evaluation can be made. For more guidanceon how to carry out a CED analysis, consult with yourstate office about CED training, the CED TrainingManual, and the CED Workbook. The workbookcontains step-by-step instructions and explanation ofeach step of the process. Lessons and questions areprovided for self-study. Always keep in mind thateconomics is just one of the many tools available tohelp NRCS do a better job and to help the land usermake more informed decisions. Figure 5-6 is a chartpresented to graphically explain the CED decision-making process.

Figure 5–6a CED decisionmaking process

Benchmark

Decision

Values

Implement plan Experience

Alternative

Impacts

CEDworksheet




(b) Steps in the CED process

(i) Benchmark

Field office level planning efforts should always firstidentify the benchmark condition. The planner andland user work together to develop a picture of exist-ing conditions, trends, problems, opportunities, andobjectives. The assistance provided is based upon soil,water, and other natural and cultural resource infor-mation. The description of benchmark conditionscould include:

• Other inventories and evaluations• Description of current crops, farming practices,

livestock type and condition, and availableequipment

• Consideration of sociological and economiccharacteristics

Planning objectives and the complexity of each situa-tion determine the level of detail necessary for inven-tories and evaluations.

The objectives of the land user will usually affect thekind and amount of information gathered and evalu-ated. However, the formulation of planning objectivesrequires that the objectives of society as well as thoseof the land user be considered. The planning processshould also identify opportunities. This creates abroader view that goes beyond the search for resourceproblems to recognize where resource enhancementsmay be achieved. For example, if a given area does nothave a significant soil resource problem onsite, oppor-tunities may still exist to make on-farm improvementsthat could increase efficiency and profitability, whileat the same time reducing negative water or air qualityeffects offsite.

(ii) Alternatives

Alternatives that meet both individual and societalobjectives need to be considered after a picture of thebenchmark situation and expected future trends aredeveloped. The CMS (Conservation ManagementSystem) formulation process will normally be used todevelop alternatives that provide a desirable view ofthe future.

Proposed alternatives enable planners to develop apicture of the conditions that could exist on the farmor ranch with conservation treatment. Alternativesrepresent the world of possibilities, a vision of whatcould be, based on predictive models, professional

judgment, and experience with the expected effects ofeach action or set of actions considered. They are thedifferent options that are proposed to deal with cur-rent and future problems or issues arising from theexisting situation.

An alternative is generally a Resource ManagementSystem (RMS), but could also be an Acceptable Man-agement System (AMS), or Alternative ConservationSystem (ACS) for plans developed for the 1985 FoodSecurity Act. It could be a single practice or simply anadjustment to present farming operations. Proposedalternatives must be consistent with Sections III andIV of the Field Office Technical Guide (FOTG), andmust also be within the approval authority of theplanner. Apart from the FOTG, the experience andknowledge of the planner and decisionmaker are themain sources of information used for selection.

To achieve a specific alternative, certain steps oractions need to be taken. Examples of actions includea change in cropping sequence, land use, time ofseeding, tillage or timing of cultivation, structuralimprovements to the farm, or simply lowering thespeed of a single tillage operation. Each individual hasa different experience base that can be increased byon-the-job training, specialized training courses, fieldtrials, or the use of models. A useful learning experi-ence for planners is to visit land users with successfulconservation treatments already applied. Technologytransfer through exposure in this manner rapidlybroadens an employee’s perspective and improvestheir expertise and confidence. If successful on-farmexperiences are documented and shared as casestudies, the knowledge base of others within andoutside the agency could also be easily enhanced.Such experiences should be recorded first in physicaland biological terms rather than monetary ones, be-cause monetary values are simply a translation of theformer and can be expressed in current dollars at anytime.

(iii) Impacts

The completed alternative is compared with thebenchmark condition to estimate the impacts of theactions. The impacts of applied conservation optionsare the differences between the benchmark or currentcondition and trends and the proposed alternativesituation. Quantification of the impacts is dependentupon the degree of detail used to describe or measurethe benchmark and expected alternative conditions.




The impacts should be described in narrative form at aminimum, and in quantitative terms to the extentpossible. They should also be recorded in an easy tounderstand manner for consideration by the decision-maker.

Conservation Effects or Impacts Worksheets can beused to record this information. Differences in erosionrates, habitat values, water quality, acres farmed,bushels harvested, labor and fuel requirements, pesti-cides used, etc., should all be documented to theextent that such information is needed by the landuser or is required by the agency. The time framewhen the impacts occur might also be identified,because certain actions such as pasture improvementscan result in immediate costs, but the resulting yieldincreases may be delayed and then occur for an ex-tended period of time.

(iv) Values

Each individual’s values will affect the relative meritsof an impact. Ten additional quail may be a positiveimpact to one person and a negative one to another.An individual’s set of values may be in harmony withsociety’s best interest or it may be in direct conflict.Once it has been applied to the impacts, the positiveand negative points may be listed. This listing can startout generally and be expanded to increasingly detailedlevels. The procedure may involve traveling com-pletely back through the decisionmaking process, or itmay involve increasingly sophisticated levels of detailon the same impacts. The process is continued untilthe land user has enough detail to make an informeddecision. In most cases, the planner will identify thecosts and describe necessary maintenance for each ofthe options. Often a limited amount of detailed infor-mation will be enough. Occasionally, however, a morecomplex analysis will be necessary, and the conceptspresented in this handbook may help.

610.0507 EconomicThresholds

Integrated pest management (IPM) is an approach topest control that combines biological, cultural andother alternatives to chemical control with the judi-cious use of pesticides. The objective of IPM is toreduce pest infestation below a level that can causeeconomical damage while minimizing harmful effectsof pest control on human health and environmentalresources.

A key principle of IPM is that pesticides should only beused when field examination or “scouting” shows thatinfestations exceed economic thresholds. The eco-nomic threshold occurs when the levels of pest popu-lation that, if left untreated, would result in reductionsin revenue that exceed treatment costs.

The point at which input starts to “pay” for itself iscalled the economic threshold. Economic thresholdscan assist farmers and ranchers make decisions aboutpesticide application. Undesirable weeds and insectscan cause major injury to a crop. A small amount ofinjury may be tolerable if it does not significantlyaffect crop yield and, consequently, does not signifi-cantly affect revenue gained from selling the crop.Nevertheless, if the presence of pests is considered toaffect crop yield, decisions about using pesticidesmust be based on whether the cost of treating withpesticides is less than the value of expected crop yieldloss.

(a) Economic Threshold - Insecti-cides

The insecticide economic threshold is the point whereexpected crop damage from insects is high enough sothat insecticide control costs equal the value of ex-pected yield loss due to the insects.

The following represents a method that can be used toassess the need to apply insecticide (economic thresh-old) in corn where the European corn borer is thetarget species.




Needed Information:• Expected crop yield (without presence of corn

bores).• Expected crop market price.• Estimated population density of borers and

expected yield loss (sources of yield loss infor-mation include USDA Extension Service, agricul-tural research institutes, and producer’s experi-ence).

• Cost of insecticide treatment (chemical andapplication).

Example: An average of one borer per plant is esti-mated to cause a 5 percent yield loss. Scouting thefield results in about 2 worms per plant. Application ofan insecticide would provide 75% control. Chemicaland application costs are $12 per acre. Expected yieldis 125 bushels per acre, with an expected market priceof $2.20 per bushel.

Potential Yield Loss/Acre =125 bushels x 10% (2 borers/plant) = 12.5 bushels

Expected Value of Loss/Acre =12.5 bushels x $2.20 = $27.50

Preventable Value of Loss/Acre =75% x $27.50 = $20.63

In this example, the net gain from insecticide treat-ment would be $8.63 ($20.63 - $12). Therefore, it wouldbe advantageous to treat the field. Had the treatmentcosts exceeded $20.63 per acre, then further lossescould be prevented by not treating the field at thetime.

According to surveys conducted by the USDA Eco-nomic Research Service, scouting and threshold useare widespread in specialty crop production. Chemicaldealers, crop consultants, and other professionalsscouted nearly two-thirds of the U.S. fruit and nutacreage and nearly three-quarters of the vegetableacres in the surveyed states for insects. Growersreported using economic thresholds as the basis formaking pesticide treatment decisions on virtually all ofthese scouted acres. Potato growers reported that 85percent of their acreage was scouted in 1993, andeconomic thresholds were used in making nearlythree-quarters of their insecticide application deci-sions. Growers of two-thirds to three-fourths of cornand soybeans reported using scouting, mostly by

themselves or a family member. Most of these growersreported using economic thresholds as well. Nearly 90percent of the cotton acreage was scouted, includingcommercial scouting services on 40 percent of thisacreage. Insect pests cause large economic losses incotton production, and entomologists have beendeveloping economic thresholds for these pests forseveral decades.

Why manage pesticides?

Concerns about the side effects of synthetic pesticidesbegan emerging in scientific and agricultural commu-nities in the late 1940’s, after the problems with insectresistance to DDT. Many unintentional effects ofpesticide exposure on nontarget species have beenreported since then, including acute pesticide poison-ings of humans (especially during occupational expo-sure) and damage to fish and wildlife, including spe-cies that are beneficial in agricultural ecosystems.Since the 1960’s, especially after the publication ofSilent Spring by Rachel Carson in 1962, and the estab-lishment of US Environmental Protection Agency in1970, some pesticides have been banned, others re-stricted in use, and others’ formulations changed tolessen undesirable effects.

Human health impacts

The American Association of Poison Control Centersestimates that approximately 67,000 nonfatal acutepesticide poisonings occurs annually in the UnitedStates. However, the extent of chronic illness resultingfrom pesticide exposure is much less documented.Direct exposure to pesticides by those workers whohandle and work around these materials is believed topose the greatest risk, but indirect exposure throughtrace residues in food and water is also a source ofconcern.

Environmental quality

Documented environmental impacts of pesticidesinclude:

• poisonings of commercial honeybees and wildpollinators of fruits and vegetables

• destruction of natural enemies of pests in naturaland agricultural ecosystems

• ground and surface water contamination bypesticide residues which cause severe damage tofish and other aquatic organisms, birds, mam-mals, invertebrates, and microorganisms

• population shifts among plants and animalswithin ecosystems toward more tolerant species.




Pesticide resistance

After repeated exposure to pesticides, insect, weed,and other pest populations in agricultural croppingsystems may develop resistance to pesticides througha variety of mechanisms. In the United States, over 183insect and arachnid pests are resistant to 1 or moreinsecticides, and 18 weed species are resistant toherbicides. Cross-resistance to multiple families ofpesticides, along with the need for higher doses andnew pesticide formulations is a growing concernamong entomologists, weed ecologists, and other pestmanagement specialists.

Recent laws and initiatives have committed USDA toreduce risk and use of pesticides and promote sustain-able agriculture that reduces contamination of thenation’s natural resources. Projects, programs, andinitiatives are also ongoing at the regional level forresource management and protection. The goal ofNRCS is the adoption of integrated pest managementon all private lands. In meeting the requirements of theFood Quality Protection Act (1996), NRCS is commit-ted to apply the integrated pest management thatpromotes both economic and environmental benefits,and encourages research and extension of informationthroughout strategic alliance with other agencies andorganizations in the nation.

(b) Economic Threshold - Herbicides

The herbicide economic threshold is the point whereweed density is high enough so that herbicide controlcosts equal the value of the expected lost yield due toweed density. If a specific herbicide is applied on afield where the threshold is not reached, then excesscosts are incurred. For example, if the expected yieldloss due to weeds is $12 per acre and herbicide costsare $18 per acre, then this could result in a $6 per acrein unnecessary costs.

The following suggests a method that can be used toevaluate the need to apply herbicide (economicthreshold) in corn.

Needed Information:• Expected crop yield.• Expected crop market price.• Densities of weeds in the field by species and

expected yield loss (sources of yield loss infor-mation include Extension Service, agriculturalresearch institutes, producer’s experience, etc.).

• Cost of herbicide treatment (chemical and appli-cation).




Example: A corn field has an average of 6 giant ragweed, 24 pigweed, and 10 giant foxtail plants per 100 feet of row.Using the chart below, expected yield losses as the result of the weeds are 1.5% (interpolated), 2%, and 1% respec-tively, or a total of 4.5%. If the expected yield is 120 bushels per acre and the expected price is $2.00/bushel, thenthe potential yield loss would be $10.80 per acre (4.5% x 120 bushels x $2 = $10.80). If herbicide treatment costswere less than $10.80 per acre, then treatment would be justified. If herbicide treatment costs are greater than$10.80 per acre, then additional costs could be reduced if the herbicide were not applied at this time.

Percent corn yield loss Percent soybean yield loss1 2 4 6 8 10 1 2 4 6 8 10

——————Number of weed clumps per 100 ft of row———————

WeedCocklebur 4 8 16 28 34 40 1 2 4 6 8 10Giant Ragweed 4 8 16 28 34 40 1 2 4 6 8 10Pigweed 12 25 50 100 125 150 2 4 6 10 15 20Lambsquarter 12 25 50 100 125 150 2 4 6 10 15 20Velvetgrass - - - - - - 8 16 24 32 40 50Morning glory - - - - - - 8 16 24 32 40 50Jimsonweed - - - - - - 8 16 24 32 40 50Smartweed - - - - - - 8 16 24 32 40 50Giant Foxtail 10 20 50 100 150 200 5 10 17 25 32 44Shattercane 6 12 25 50 75 100 2 5 8 11 14 18Volunteer Corn - - - - - - 1 2 3 4 5 6

Source: Nebraska Cooperative Extension Service, 1989




610.0601 Cost and return estimator (CARE) 6–1

610.0602 Erosion productivity impact calculator (EPIC) 6–2

610.0603 Grazing lands application software (GLA) 6–3

610.0604 Interactive conservation evaluation (ICE) 6–4


Chapter 6 Computer Tools


This chapter describes selected computer programs(tools) that have been useful for economic analysisand evaluation. Information on additional computerprograms will be added as it becomes available anddistributed via a technical note until incorporated inthis handbook. These tools and related economic dataare on the NRCS Resource Economics and SocialSciences Homepage in Economics and Related SocialSciences Issues & Information. The site address ishttp://www.nhq.nrcs.usda.gov/RESS/econ/ressd.htm.

Detailed information and instructions for use of thesecomputer tools can be found in the associated usermanual.

Numerous economic computer tools have been devel-oped and used by NRCS, but will not be referenced inthis document. However, technology and Agencypolicy have led to more user friendly models or bettertools. Technical notes documenting those models maybe obtained from the state economist or nationaleconomics staff. Some of these include:

• Conservation Option Procedure• The Economics - Floodwater damage computer

application program (ECON2)• Economic Module for FOCS• Land Damage Analysis Program (LDAMG)• Value of Agriculture Production (VAGPR)

610.0601 Cost and returnestimator (CARE)

The CARE program is designed to generate costs andreturns for crop enterprises or operations. CAREconsists of a complete budget generator and afull-screen editor called Quick Budget. The budgetgenerator uses data bases that store information onfarming activities. It allows the user to assemblefarming activities to encompass variations in owner-ship, usage patterns, and machinery complements toprepare complete cost and return estimates for vari-ous form enterprises. Quick Budget allows the user toselect a previously prepared generator budget sum-mary and edit only the summary on the screen. Therevised budget summary can then be saved, printed, orboth.

The CARE User Manual has instructions on use of theprogram.

The budget output formats available in the CAREprogram are:

• Quick Budget Report• Quick Budget Comparison Report• Summary Budget Report• Detailed Budget Report

Selection of a budget output format should be basedupon the need for a particular degree of detail. Asimple, yet quite detailed format that would meet theneeds in most field office applications is the QuickBudget Report.

Quick Budget provides an easy way to interactivelymodify the summary results of the CARE BudgetAnalysis Report. It starts by creating a budget fromdata bases maintained in the main CARE system or byloading a Quick Budget saved from a previous session.CARE converts the budget into a spreadsheet that canbe edited, allowing the user to make changes to theoperations, materials, yields, and prices. The effect oncosts and returns can then be assessed. Quick Budgetalso allows the user to construct a budget fromscratch without going through the full CARE budgetconstruction.


Computer ToolsChapter 6


Quick Budget Comparison Report enables comparisonbetween two budgets and displays the changes thatcould occur when one system is switched to another;for example, conventional tillage to no-tillage.

610.0602 Erosion produc-tivity impact calculator(EPIC)

EPIC is a comprehensive computer model developedto determine the relationship between soil erosion andsoil productivity. It stimulates the erosion processesby using a daily time step and uses readily availableinputs. Since erosion can be a relatively slow process,the model is capable of simulating hundreds of years ifnecessary.

EPIC is capable of computing the effects of manage-ment changes on outputs. This program is composedof physically based components for simulating ero-sion, plant growth, and related processes, and eco-nomic components for assessing the cost of erosion,and determining optimal management strategies. TheEPIC physical components include hydrology, weathersimulation, erosion-sedimentation, nutrient cycling,plant growth, tillage or tilth, and soil temperature.

6–3




610.0603 Grazing landsapplication software (GLA)

GLA, version 2.0.4, July 1995, is a user-friendly grazingland decision support software package created by theRanching Systems Group, Department of RangelandEcology and Management at Texas A&M University,College Station, Texas. GLA is also supported by theNRCS Grazing Lands Technology Institute.

GLA was developed for the grazing land planner/operator to aid in the inventory of land units, calculatestocking rates, calculate multiple species stockingrates (livestock and wildlife), determine nutritionalrequirements for grazing livestock, and analyze theeconomic value of treatment alternatives. Each database in the program requires population of informa-tion which is localized to the area in where it will beused. For example, plant species, growth curves, andproduction may be specific to a state or adjusted to afield office location.

The program contains two data base modules used tolocalize specific information for an area and client.These modules include animal resources data baseand plant/soil resources data bases. They includeanimal specific information, feedstuff information,soils, plant species, preferences, and productionlevels. The client module calculates stocking rates byselecting from data bases to customize and includeinformation on soils, land use, species, and productionlevels specific to an individual's operation.

The decision support module includes a managementevaluation program, multi-species calculator, and anutritional balancing analyzer. The managementevaluation offers the planner an opportunity to analyzea client's potential to successfully complete a manage-ment system. The multi-species calculator determinesthe ratio between kinds of livestock and wildlife andthe stocking rate. The nutritional balancer determinesthe animal's requirements based on environment,breed characteristics and animal demands during theevaluation period.

The economics module compares the present carryingcapacity to the future capacity based on a conserva-tion management system. GLA considers information,such as discount rate, planning horizon, animal de-mand, and variation in rainfall from the average.Specific data, such as variable costs, percent offspring,animal selling price, and weight, are also included inthe evaluation. Cost of improvement practices andincreases from additional animal units, improvedweights and selling price are compared to calculatenet present value and the internal rate of return. Thisallows different conservation systems to be comparedfor decisionmaking purposes.




610.0604 Interactive con-servation evaluation (ICE)

The ICE program provides a computerized evaluationprocess to assist land users in evaluating and compar-ing alternative conservation management systems. Forinstructions on use of the ICE program, see the ICEUser Manual.

Although ICE is not widely used, it was designed toanalyze and compare the without condition with up tonine additional conservation options. Soil loss, futureyields with soil depletion, and average annual costs ofconservation practices are all calculated. Using cropbudget data, ICE calculates gross returns, costs ofproduction, and net returns. Other effects, such asimpacts on wildlife and water quality, may also berecorded.

An ICE Preevaluation Worksheet has been developedto facilitate use of the ICE program. The worksheet isuseful when gathering and organizing input dataneeded for the program, especially if the districtconservationist is visiting farmers or does not haveimmediate access to a computer. The worksheet isalso extremely useful as a training aid since it showswhat information is needed and organizes it into theproper sequence for entry. Contact your state econo-mist if worksheets are required.

(200-vi, NEH, draft, June 2001)

References

Barlowe, Raleigh. 1958. Land resource economics.Prentice-Hall.

Carlson, Gerald A., David Zilberman, and John A.Miranowski. 1993. Agicultural and environmentresource economics.

United States Department of Agriculture, NaturalResources Conservation Service. 1993. NationalPlanning Procedures Handbook.

United States Department of Agriculture, NaturalResources Conservation Service. 1996. Waterquality. National Resoures Economics Hand-book, part 612.

United States Department of Agriculture, NaturalResources Conservation Service. Economicevaluations. National Engineering Handbook,part 652, Irrigation Guide, chapter 11.

United States Department of Agriculture, NaturalResources Conservation Service. 1997. Grazing-lands economics. National Range and PastureHandbook, chapter 10.

United States Department of Agriculture, NaturalResources Conservation Service. 1997. GeneralManual, Part 400, Economics policy.

United States Department of Agriculture, NaturalResources Conservation Service. Field OfficeTechnical Guide. Sections I and V.

United States Department of Agriculture, NaturalResources Conservation Service. 1998. NationalResources Economics Handbook, Water re-sources, part 611.

United States Department of Agriculture, NaturalResources Conservation Service. 1999. CORE4Manual.

United States Water Resources Council. 1983. Eco-nomic and environmental principles andguidelines for water and related land resourcesimplementation studies (P&G).


References

R–2 (200-vi, NEH, draft, June 2001)


Glossary

Alternative cost Expenditures for achieving a goal or objective similar to one previously evaluated.

Amortization Converting capital or initial cost to annual cost by determining the size of annual paymentsneeded to pay off a debt over a given time period at a given interest rate. (i interest rate, n =number of time periods)

i i

i

n

n

1

1 1

+( )+( ) −

Amount of an How much an annuity invested each year will grow over a period of years. ( i = interest rate,annuity of $1 n = number of time periods)

per year

1 1+( ) −ii

n

Annuity A series of equal payments made at equal intervals of time over time. An annuity may be abenefit or a cost.

Assessed value The estimated worth of property for general property tax purposes.

Average annual The difference between the without project average annual damages and the with projectbenefits average annual damage. Quantifiable benefits for an evaluation period.

See average annual ?

Average annual Initial cost of capital amortized to an annual cost plus the necessary operation and mainte- cost nance costs.

Average annual The present value (at a given interest rate) of benefits and costs that occur at subsequentequivalent intervals over the period of analysis. Present values are then annualized by amortizing over

(annualized) the period of analysis at the given interest rate. Intervals are identified by the schedule ofobligations.

Average product The ratio of total output (a total product) to the quantity of input used in producing thatoutput.

Base period A point in time where other index numbers are compared, for example, the year 1967 = thebase index 100.

Benchmark The resource setting from which options are evaluated. A benchmark is commonly thoughtof as representing the current resource setting.

Benefit-cost ratio A mathematical computation where benefits accruing from some action are divided by thecost of the action.

Breakeven point The point where the proceeds from total output of an alternative plan equal the costs of allinputs associated with that alternative.


Glossary

G–2 (200-vi, NEH, draft, June 2001)

Capital One of four traditional factors of production used to produce goods and services. Capital isgenerally defined to include machinery, livestock, buildings, and/or cash that can be used topurchase or trade for ohter resources. Capital does not include land and labor contributedtoward the production of goods and services.

Capital-investment Monetary expenditures necessary for initial installation of a practice or system.

Capital-recovery The length of time an individual or group may choose to retire (pay-off) a debt. Seeperiod evaluation period.

Cash-outlay Direct cash expenditures for purchase of items such as farm supplies, hired labor, and ser-vices.

Competitive A business entity which increases its own production in order to capture a greater share ofenterprise the market, thus causing other competing entities to decrease their production.

Complementarity Where an increase in the production of one good or service will cause an increase in produc-tion of another.

Composite acre A weighted unit showing the percentage or proportion that each crop is of the total croplandacreage.

Compound interest Interest that is earned for one period and immediately added to the principal, thus resultingin a larger principal on which interest is computed for the following period. (i = interest rate,n = number of time periods)

1 +( )i n

Compound interest A collection of factors used to express the functions of interest rate and time.and annuity tables

Cost-effectiveness An appraisal technique especially useful where benefits cannot be reasonably measured inanalysis only money terms. It is the only method used to any extent to deal with intangible benefits.

On a present value basis, the least expensive alternative combination of tangible costs thatwill realize essentially the same intangible benefits, needs to be identified. This combinationis often referred to as “least cost” or “cost-effectiveness”. Once it is determined that the leastexpensive alternative has been identified and its costs valued, then the subjective question,is it worth it, can be more meadily addressed.

Cost and Return A software program designed for use on a microcomputer to create and/or adjust cost andEstimator (CARE) return estimates (crop budgets).

Crop budget A systematic listing of resources used, their cost for specified yield levels, and the value ofthe output by individual crops or enterprises.

Crop budget A computerized system designed to create and adjust cost and return estimates.system

Cropping pattern The crops that are cuurrently grown in an evaluation period. Project the most probablecropping patterns expected to exist with and without project.

G–3(200-vi, NEH, draft, June 2001)


Glossary

Current The weighted average of prices recived for a commodity over the preceeding 3- to 5-yearnormalized period.

prices

Custom rate The usual fee for farm services rendered; generally for machine hire.

Demand The quantity of a good (or service) which consumers will purchase at a certain price.

Deposition Soil movement (erosion) from one location to another resulting in the covering of fertile soilsediment, which results in a less productive soil.

Depreciation A decrease in the value of property through wear, deterioration, or obsolescence.

Diminishing A condition where each successive unit of input adds less to total output than the previousreturns unit.

Economic analysis An analysis done using economic values. In general, economic analysis omits payments suchas credit transactions, and values all items at their “value in use” or their opportunity cost tothe society.

Economics The science of allocating limited resources among competing ends so as to maximize somedesired quality or benefit.

Economies of scale Ability of business firms to spread their fixed costs over larger quantities of output.

Effective economic The point where the present worth of expenditures for extending the life of a facility exceedslife the present worth of its benefits.

Efficiency A measuring stick for evaluating choices. In general, efficiency refers to the ratio of output toinput.

Evaluation period Time period beginning at the end of the installation period, with the time period based on theexpected useful economic life.

Factors of Resources, either human (labor) or nonhuman (capital) used for producing goods and/orproduction services. The four factors of production commonly identified are land, labor, capital, and

management.

Fair market value The price at which an owner of an asset would sell that asset to a willing buyer.

Family labor Non-hired labor inputs from an individual or from their household.

Financial analysis An analysis done to determine effects of a particular action or plan on the liquidity, cashflow, or profitability of a business or enterprise.

Fixed costs Expenditures an enterprise would incur even if no output were produced.

Gross returns Total production in units multiplied by the price per unit.


Glossary


Interactive A software program designed for use on a microcomputer to make economic analyses of theConservation costs and benefits of conservation.

Evaluation (ICE)

Interest The earning power of money or the price for the use of money, otherwise known as the timevalue of money or return of capital.

Interest rate (i) The cost of using borrowed capital or the value placed on using owned capital, either ofwhich are determined by demand, time, or risk.

Internal rate The interest rate money will earn as the total investment of an enterprise is repaid to thatof return enterprise by its revenues.

Lagged A value which occurs sometime in the future is referred to as lagged when discounted topresent value.

Land voiding A stage of land deterioration, generally through gully erosion, where the remaining produc-tive capacity of the land is for all practical purposes zero.

Least cost The lowest expenditure for installing, operating, and maintaining a system or systems ofalternative conservation measures to achieve a specified objective. The objective could be minimum soil

erosion, maximum water quality, and optimal wildlife habitat.

Linear A technique sometimes useful for predicting an optimum level of production. The best com-programming bination of production activities is determined for this optimal production level through

application of specific, linear, physical, or monetary constraints to a maximum level of pro-duction.

Management A decision making process of determining how land, labor, and capital will be combined inan enterprise or organization for the purpose of obtaining a specific objective. One of fourfactors of production

Marginal analysis Determining the level of production where marginal costs are equal to marginal benefits andnet benefits are maximized.

Marginal benefits The additional benefit of producing one more unit of output.

Marginal costs The additional cost of producing one more unit of output.

Marginal rate of The amount of one commodity or product a consumer is willing to give up in order to get ansubstitution additional unit of another commodity or product.

Maximum net The level of development where the value of total output minus the value of total requiredbenefit input is the greatest.

Mean Mathematical average, obtained by dividing the sum of two or more quantities by the numberof these quantities.

Median Designating the middle number or the middle between two numbers in a long series of or-dered numbers or values.



Glossary

Net returns The residual value of production after total costs of production are subtracted from the grossreturns.

Number of years Number of years (or periods) into the future for which the calculations are being made.(or periods) hence

Objective Qualified goals or achievements to answer or solve projected needs as expressed by a personor group of persons.

Off-site benefits Benefits accruing to areas or persons outside the problem-controlled area.

On-site benefits Benefits accruing at the general location of the control practice.

Operating cost Expenditures for machine operation which generally include lubrication, repairs, and fuel(not applicable to all machines).

Operation and (1) Actual expenditures and services performed to insure proper functioning of the facility ormaintenance measure throughout its intended life. (2) Capital outlay required ot maintain the benefit

and replacement stream and planned mitigation measures.

Opportunity costs The earning capabilities of money for use in alternative investments having similar risk andtime frames.

Overhead costs Expenditures associated with the farm organization, not generally influenced by levels ofproduction or kinds of crops grown such as most utilities, machine shop and related shoptools, and accountant or management fees.

Ownership costs Costs unrelated to rate of annual use, such as expenditures for depreciation, taxes, intereston investment, insurance and housing.

Partial budgeting A technique where only the relevant changes in income and production are identified, listed,and used in the analysis.

Perennial crops Those having a life cycle of more than two years.

Performance rate Rate of accomplishment based on machine width, tractor speed, and the percent efficiency.

Perpetuity An indefinite or extremely long period of time.

Planning horizon The time period within which a business personal farmer, or rancher formulates their activi-ties.

Present value Future costs or benefits discounted or lagged to show their current value.(or present worth)

Present value of Today’s value of an annuity that is not constant but decreases uniformly over a period ofa decreasing time.

annuity


Glossary


Present value of The discounted or lagged value of a series of equal payments to be covered over a period ofan annuity of years.

$1 per year

Present value of Today’s value of an annuity that is not constant but increases uniformly over a period ofan increasing time.

annuity

Present value of 1 The amount that must be invested now at compound interest to have a value of one in a givenlength of time, or what one dollar due in the future is worth today. This is also known as thediscount factor or the reciprocal of the compound interest factor.

Price The exchange value for commodities usually determined through the market system.

Price base A common level of prices generally adjusted through the use of price indexes.

Price index A procedure to reflect changes in prices relative to prices in some base period.

Principal The initial investment (exclusive of interest) and the ensuing amounts as payments areperiodically made on that principal.

Private cost Those accruing to identified individuals.or benefit

Production costs Expenditures, both fixed and variable, for all items required for specified levels of crop orlivestock production.

Projections Best estimates of future development, based upon historical trends, analysis of currentrelationships and an evaluation of foreseeable conditions.

Public cost Those accruing to groups of people and remaining inseparable to individuals.or benefit

Quantity Changes achieved through resource improvement in the per acre yield (or output) for hardifferential vested crops.

Redevelopment Benefits derived in areas having chronic underemployment or unemployment problems bybenefits providing employment opportunities through construction, operation and maintenance of

resource improvements.

Relocation costs Expenditures for replacement housing, moving and related needs, advisory services, ormovement of business operations, brought about by installation of project measures.

Rent The residue left for the fixed resource (land) after all other production costs are deducted(pure economic) from total gross returns. .

Salvage value The monetary value of an investment at the end of its economic life. Usually the trade-invalue as new equipment is purchased.



Glossary

Secondary The values added over and above the immediate products or services of the project as abenefits result of new demands on the transporting, processing, and marketing industries, supplying

of additional materials and services required to make possible the increased net returnsand the provisions of maintaining and operating the project features.

Sectors The various categories of business enterprises, each having specific characteristics, i. e .,agriculture, mining, manufacturing, etc.

Separable cost For each purpose, the difference between the cost of a multipurpose structure and the costof the structure with that purpose omitted.

Short run A time period long enough to permit desired changes in output without altering the size ofthe farm unit or organization.

Simple interest Money earned on the principal only and not on accumulated interest.

Simulation A highly sophisticated computerized technique generally used to examine regional eco-studies nomic problems. The model -embodies relevant parameters and relationships of the eco-

nomic sectors to characterize over time the behavior of a real economic system.

Sinking fund A program for capital accumulation over a period of years. The factor indicates how muchneeds to be invested per year at a given interest rate to accumulate $1 by a given date.

Social cost Adverse conditions, either monetary or non-monetary, that are liabilities of society as awhole.

Specific costs The cost of facilities that exclusively serve only one project purpose.

Standard of living The necessary amenities of personal consumption which can be provided by the currentestimated disposable family income.

Streambank The removal of soil from the streambank by water movement. This is considered a perma-erosion nent resource damage.

Substitution of The continuing application of new technological innovations to improve productioncapital efficiencies over what can be provided with manual efforts.

Supplementary Production from one enterprise is increased without increasing or decreasing productionenterprise of another enterprise.

Supply The quantity of a good or service a firm is willing to produce to sell at a given price.

Synthetic analysis Using unit values based on historical information and relating to estimated characteristicsof future storm events

.Technological Gains in production efficiencies through new innovations of the scientific and industrialadvancement arts.

Time frame Number of years between intervals of study, as in OBERS projection’s 10 year timeframes,i.e., 1980, 1990, 2000, etc.


Glossary


Turnover The average number of times a dollar changes hands as it is spent.

Unit cost Monetary value or charge per some uniform amount, i.e., cost per cubic yard of concrete,cost per hour for owning an 18-foot self-propelled combine, etc.

Value added The increase in value resulting from doing something to or with the product.

Variable costs Costs relevant to production or those occurring only as production takes place.

With condition The anticipated situation which is projected to occur in the future if the proposed projectmeasures are installed.

Without The anticipated situation which is projected to occur in the future, if the proposed projectcondition measures are not installed.


Appendix A Interest and Annuity Sample Prob-lems and Solutions

Introduction

Interest and annuity (I&A) tables are a simple and easyto use tool that can be used when you need a specificfactor to solve a specific type of economic analysis. Acommonly used reference for these factors is the“Compound Interest and Annuity Tables” book, whichcan be found in your State office. These same tablesare also contained in any hand held financial calcula-tor. For demonstration purposes, specific pages fromthe “Compound Interest and Annuity Tables” book areincluded in the following sample problems and solu-tions. Formulas for computation of each of the col-umns can be found in chapter 5 or the Glossary of thishandbook. If you have a need for interest and annuityfactors not covered by these tables or do not haveaccess to your states’ “Compound Interest and AnnuityTables” book, contact your State economist.

Of all the interest and annuity factors, the one you aremost likely to use is the amortization factor. For thisreason, a small wallet sized card has been preparedwith amortization factors for the most commonly usedinterest rates and time spans. Evaluation examples areon the back of the card. Additional copies of thisAverage Annual Cost Table Card may be obtainedfrom your State economist. The front and back of thewallet size card is illustrated below.

Effective use of interest andannuity tables

What follows are interest and annuity examples whichillustrate the principles and procedures discussed inthis handbook. These examples will provide a goodunderstanding of how to approach and carry out aneconomic evaluation for conservation decisionmaking.

Interest and annuity tables supporting the examplesare included. Detailed listings of interest and annuitytables can be found in the “Compound Interest andAnnuity Tables” book located in your State office, orany handheld financial calculator.

If you need help solving these sample problems con-tact your State economist.


Appendix

A–2 (200-vi, NEH, draft, June 2001)

Example 1

Receive $600 per year for 20 years. What is the average annual value over a 50-year evaluation period at 8%?

600$

0 20Year

50

Principles1. Present value of an annuity2. Average annual value (amortization)

(Present value of annuity of $1, 20 years at 8%) (600) = (9.8181) (600) = 5,890.89(Amortized factor 50 years at 8%) (5,890.89) = (.08174) (5890.89) = $481.52 year

Because of rounding, calculations may appear sightly off.

A–3(200-vi, NEH, draft, June 2001)

1.08001.16641.25971.36051.46931.58691.71381.85091.99902.15892.33162.51822.71962.93723.17223.42593.70003.99604.31574.66105.03385.43655.87156.34126.84857.3964

7.988818.62719.3173

10.062710.867711.737112.676013.690114.785315.968217.243618.625320.115321.724546.9016

101.2571218.6064471.9548

1018.91512199.7613

123456789

101112131415161718192021222324252627282930313233343536373839405060708090

100

0.92590.85730.79380.73500.68060.63020.58350.54030.50020.46320.42890.39710.36770.34050.31520.29290.27030.25020.23170.21450.19870.18390.17030.15770.14600.13520.12520.11590.10730.09940.09200.08520.07890.07300.06760.06260.05800.05370.04970.04600.02130.00990.00460.00210.00100.0005

1.00002.0800

3.2644.50615.86667.33598.9228

10.636612.487614.486616.645518.977121.495324.214927.152130.324333.750237.450241.446345.762050.422955.456860.893366.764873.105979.954487.350895.3388

103.9659113.2832123.3459134.2135145.9506158.6267172.3168187.1021203.0703220.3159238.9412259.0565573.7702

1253.21332720.08015886.9354

12723.938627484.5157

1.00000.48080.30800.22190.17050.13630.11210.09400.08010.06900.0601

0.5270.04650.04130.03680.03300.02960.02670.02410.02190.01980.01800.01640.0150

0.1370.01250.01140.01050.00960.00880.00810.00750.00690.00630.00580.00530.00490.00450.00420.00390.00170.00080.00040.00020.0001

.0000

1.08000.56080.38800.30190.25050.21630.19210.17400.16010.14900.14010.13270.12650.12130.11680.11300.10961.10670.10410.10190.09980.09800.09640.09500.09370.09250.09140.09050.08960.08880.08810.08750.08690.08630.08580.08530.08490.08450.08420.08390.08170.08080.08040.08020.08010.0800

0.92592.64065.02217.9622

11.365115.146219.230623.552728.055032.686937.404642.170046.950151.716556.445161.115465.710070.214474.617078.907983.079787.126491.043794.828498.4789

101.9941105.3742108.6198111.7323114.7136117.5661120.2925122.8958125.3793127.7466130.0010132.1465134.1868136.1256137.9668151.8263159.6766163.9754166.2736167.4803168.1050

0.92592.70925.28638.5984

12.591117.214022.420428.167034.413941.124048.262955.799063.702871.947080.505689.357998.4795

107.8514117.4550127.2732137.2900147.4907157.8618168.3905179.0653189.8753200.8104211.8615223.0199234.2777245.6275257.0625268.5764280.1633291.8179303.5351315.3103327.1391339.0177350.9423472.0814595.2931719.4648844.0811968.9033

$$$$$$$$

Futurevalueof one

?$ ?

$ ??

??$

$$

$

Presentvalueof one

Futurevalue ofannuity

of 1

Amount ofannuity for

a futurevalue

Presentvalue ofannuity

of 1

Amount ofannuity fora present

value

Compounding Discounting Amount ofannuity of 1

Sinkingfund

Amortization

Presentvalue ofincreaseannuity

Presentvalue of

decreaseannuity

0.92591.78332.57713.31213.99274.62295.20645.74666.24696.71017.13907.53617.90388.24428.55958.85149.12169.37199.60369.8181

10.016810.200710.371110.528810.674810.810010.935211.051111.158411.257811.349811.435011.513911.586911.6546

11.71.7211.775211.828911.878611.924612.233512.376612.442812.473512.487712.4943

Name

Description

Graphic

Formula

Periods


Appendix


Example 2

After year 30, a return of $600 will decrease to 0 in year 50. Find the average annual value for a 50-year evaluationperiod at 8%.

Principles1. Present value of a decreasing annuity2. Present value of 13. Amortization

(Present value of decreasing annuity factor 20 years at 8%)($600/20) = (127.2732) (30) = 3,818.19

(Present value of 1, 30 years at 8%) (3,818.19)(.0994)(3818.19) = 379.45

(Amortization factor 50 years at 8%) (379.45)(.08174) (379.45) = 31.02

600$

0 30Year

50



1.08001.16641.25971.36051.46931.58691.71381.85091.99902.15892.33162.51822.71962.93723.17223.42593.70003.99604.31574.66105.03385.43655.87156.34126.84857.3964

7.988818.62719.3173

10.062710.867711.737112.676013.690114.785315.968217.243618.625320.115321.724546.9016

101.2571218.6064471.9548

1018.91512199.7613

123456789

101112131415161718192021222324252627282930313233343536373839405060708090

100

0.92590.85730.79380.73500.68060.63020.58350.54030.50020.46320.42890.39710.36770.34050.31520.29290.27030.25020.23170.21450.19870.18390.17030.15770.14600.13520.12520.11590.10730.09940.09200.08520.07890.07300.06760.06260.05800.05370.04970.04600.02130.00990.00460.00210.00100.0005

1.00002.0800

3.2644.50615.86667.33598.9228

10.636612.487614.486616.645518.977121.495324.214927.152130.324333.750237.450241.446345.762050.422955.456860.893366.764873.105979.954487.350895.3388

103.9659113.2832123.3459134.2135145.9506158.6267172.3168187.1021203.0703220.3159238.9412259.0565573.7702

1253.21332720.08015886.9354

12723.938627484.5157

1.00000.48080.30800.22190.17050.13630.11210.09400.08010.06900.0601

0.5270.04650.04130.03680.03300.02960.02670.02410.02190.01980.01800.01640.0150

0.1370.01250.01140.01050.00960.00880.00810.00750.00690.00630.00580.00530.00490.00450.00420.00390.00170.00080.00040.00020.0001

.0000

1.08000.56080.38800.30190.25050.21630.19210.17400.16010.14900.14010.13270.12650.12130.11680.11300.10961.10670.10410.10190.09980.09800.09640.09500.09370.09250.09140.09050.08960.08880.08810.08750.08690.08630.08580.08530.08490.08450.08420.08390.08170.08080.08040.08020.08010.0800

0.92592.64065.02217.9622

11.365115.146219.230623.552728.055032.686937.404642.170046.950151.716556.445161.115465.710070.214474.617078.907983.079787.126491.043794.828498.4789

101.9941105.3742108.6198111.7323114.7136117.5661120.2925122.8958125.3793127.7466130.0010132.1465134.1868136.1256137.9668151.8263159.6766163.9754166.2736167.4803168.1050

0.92592.70925.28638.5984

12.591117.214022.420428.167034.413941.124048.262955.799063.702871.947080.505689.357998.4795

107.8514117.4550127.2732137.2900147.4907157.8618168.3905179.0653189.8753200.8104211.8615223.0199234.2777245.6275257.0625268.5764280.1633291.8179303.5351315.3103327.1391339.0177350.9423472.0814595.2931719.4648844.0811968.9033

$$$$$$$$

Futurevalueof one

?$ ?

$ ??

??$

$$

$

Presentvalueof one


of 1


a futurevalue


of 1


value


Sinkingfund

Amortization


Presentvalue of

decreaseannuity

0.92591.78332.57713.31213.99274.62295.20645.74666.24696.71017.13907.53617.90388.24428.55958.85149.12169.37199.60369.8181

10.016810.200710.371110.528810.674810.810010.935211.051111.158411.257811.349811.435011.513911.586911.6546

11.71.7211.775211.828911.878611.924612.233512.376612.442812.473512.487712.4943

Name

Description

Graphic

Formula

Periods


Appendix


Example 3

A present return will decrease from $600 to 0 in year 20. Find the average annual value for a 50-year evaluationperiod at 8%.

Principles1. Present value of decreasing annuity2. Amortization

(Present value of decreasing annuity 20 years at 8%) ($600/20)(127.2732)(30) = 3,818.19

(Amortize over 50 years at 8%) (3,818.19)(.08174)(3818.19) = 312.10

600$

0 20Year

50



1.08001.16641.25971.36051.46931.58691.71381.85091.99902.15892.33162.51822.71962.93723.17223.42593.70003.99604.31574.66105.03385.43655.87156.34126.84857.3964

7.988818.62719.3173

10.062710.867711.737112.676013.690114.785315.968217.243618.625320.115321.724546.9016

101.2571218.6064471.9548

1018.91512199.7613

123456789

101112131415161718192021222324252627282930313233343536373839405060708090

100

0.92590.85730.79380.73500.68060.63020.58350.54030.50020.46320.42890.39710.36770.34050.31520.29290.27030.25020.23170.21450.19870.18390.17030.15770.14600.13520.12520.11590.10730.09940.09200.08520.07890.07300.06760.06260.05800.05370.04970.04600.02130.00990.00460.00210.00100.0005

1.00002.0800

3.2644.50615.86667.33598.9228

10.636612.487614.486616.645518.977121.495324.214927.152130.324333.750237.450241.446345.762050.422955.456860.893366.764873.105979.954487.350895.3388

103.9659113.2832123.3459134.2135145.9506158.6267172.3168187.1021203.0703220.3159238.9412259.0565573.7702

1253.21332720.08015886.9354

12723.938627484.5157

1.00000.48080.30800.22190.17050.13630.11210.09400.08010.06900.0601

0.5270.04650.04130.03680.03300.02960.02670.02410.02190.01980.01800.01640.0150

0.1370.01250.01140.01050.00960.00880.00810.00750.00690.00630.00580.00530.00490.00450.00420.00390.00170.00080.00040.00020.0001

.0000

1.08000.56080.38800.30190.25050.21630.19210.17400.16010.14900.14010.13270.12650.12130.11680.11300.10961.10670.10410.10190.09980.09800.09640.09500.09370.09250.09140.09050.08960.08880.08810.08750.08690.08630.08580.08530.08490.08450.08420.08390.08170.08080.08040.08020.08010.0800

0.92592.64065.02217.9622

11.365115.146219.230623.552728.055032.686937.404642.170046.950151.716556.445161.115465.710070.214474.617078.907983.079787.126491.043794.828498.4789

101.9941105.3742108.6198111.7323114.7136117.5661120.2925122.8958125.3793127.7466130.0010132.1465134.1868136.1256137.9668151.8263159.6766163.9754166.2736167.4803168.1050

0.92592.70925.28638.5984

12.591117.214022.420428.167034.413941.124048.262955.799063.702871.947080.505689.357998.4795

107.8514117.4550127.2732137.2900147.4907157.8618168.3905179.0653189.8753200.8104211.8615223.0199234.2777245.6275257.0625268.5764280.1633291.8179303.5351315.3103327.1391339.0177350.9423472.0814595.2931719.4648844.0811968.9033

$$$$$$$$

Futurevalueof one

?$ ?

$ ??

??$

$$

$

Presentvalueof one


of 1


a futurevalue


of 1


value


Sinkingfund

Amortization


Presentvalue of

decreaseannuity

0.92591.78332.57713.31213.99274.62295.20645.74666.24696.71017.13907.53617.90388.24428.55958.85149.12169.37199.60369.8181

10.016810.200710.371110.528810.674810.810010.935211.051111.158411.257811.349811.435011.513911.586911.6546

11.71.7211.775211.828911.878611.924612.233512.376612.442812.473512.487712.4943

Name

Description

Graphic

Formula

Periods


Appendix


Example 4

A return will build from 0 in year 30 to $600 by year 50. Find the averageannual value at 8% for a 50-year evaluation period.

Principles1. Present value of an increasing annuity2. Present value of 13. Amortization

Present value of an increasing annuity factor: 20 years at 8%) ($600/20)(78.9079) (30) = 2,367.24(Present value of 1: 30 years at 8%) (2,367.24)(.0994) (2367.24) = 235.26(Amortization factor: 50 years at 8%) (235.26)(.0817) (235.26) = 19.23

600$

0 30Year

50



1.08001.16641.25971.36051.46931.58691.71381.85091.99902.15892.33162.51822.71962.93723.17223.42593.70003.99604.31574.66105.03385.43655.87156.34126.84857.3964

7.988818.62719.3173

10.062710.867711.737112.676013.690114.785315.968217.243618.625320.115321.724546.9016

101.2571218.6064471.9548

1018.91512199.7613

123456789

101112131415161718192021222324252627282930313233343536373839405060708090

100

0.92590.85730.79380.73500.68060.63020.58350.54030.50020.46320.42890.39710.36770.34050.31520.29290.27030.25020.23170.21450.19870.18390.17030.15770.14600.13520.12520.11590.10730.09940.09200.08520.07890.07300.06760.06260.05800.05370.04970.04600.02130.00990.00460.00210.00100.0005

1.00002.0800

3.2644.50615.86667.33598.9228

10.636612.487614.486616.645518.977121.495324.214927.152130.324333.750237.450241.446345.762050.422955.456860.893366.764873.105979.954487.350895.3388

103.9659113.2832123.3459134.2135145.9506158.6267172.3168187.1021203.0703220.3159238.9412259.0565573.7702

1253.21332720.08015886.9354

12723.938627484.5157

1.00000.48080.30800.22190.17050.13630.11210.09400.08010.06900.0601

0.5270.04650.04130.03680.03300.02960.02670.02410.02190.01980.01800.01640.0150

0.1370.01250.01140.01050.00960.00880.00810.00750.00690.00630.00580.00530.00490.00450.00420.00390.00170.00080.00040.00020.0001

.0000

1.08000.56080.38800.30190.25050.21630.19210.17400.16010.14900.14010.13270.12650.12130.11680.11300.10961.10670.10410.10190.09980.09800.09640.09500.09370.09250.09140.09050.08960.08880.08810.08750.08690.08630.08580.08530.08490.08450.08420.08390.08170.08080.08040.08020.08010.0800

0.92592.64065.02217.9622

11.365115.146219.230623.552728.055032.686937.404642.170046.950151.716556.445161.115465.710070.214474.617078.907983.079787.126491.043794.828498.4789

101.9941105.3742108.6198111.7323114.7136117.5661120.2925122.8958125.3793127.7466130.0010132.1465134.1868136.1256137.9668151.8263159.6766163.9754166.2736167.4803168.1050

0.92592.70925.28638.5984

12.591117.214022.420428.167034.413941.124048.262955.799063.702871.947080.505689.357998.4795

107.8514117.4550127.2732137.2900147.4907157.8618168.3905179.0653189.8753200.8104211.8615223.0199234.2777245.6275257.0625268.5764280.1633291.8179303.5351315.3103327.1391339.0177350.9423472.0814595.2931719.4648844.0811968.9033

$$$$$$$$

Futurevalueof one

?$ ?

$ ??

??$

$$

$

Presentvalueof one


of 1


a futurevalue


of 1


value


Sinkingfund

Amortization


Presentvalue of

decreaseannuity

0.92591.78332.57713.31213.99274.62295.20645.74666.24696.71017.13907.53617.90388.24428.55958.85149.12169.37199.60369.8181

10.016810.200710.371110.528810.674810.810010.935211.051111.158411.257811.349811.435011.513911.586911.6546

11.71.7211.775211.828911.878611.924612.233512.376612.442812.473512.487712.4943

Name

Description

Graphic

Formula

Periods


Appendix


Example 5

A return will build from 0 to $600 in 20 years, then cease. Findthe average annual value for a 50-year evaluation period at 8%.

Principles

1. Present value of an increasing annuity2. Amortization

(Present value of an increasing annuity: 20 years at 8%) (600/20)(78.9079) (30) = 2367.24

Amortize: 50 years at 8%) (2367.24)(.0817) (2,367.24) = 193.50

600$

0 20Year

50



1.08001.16641.25971.36051.46931.58691.71381.85091.99902.15892.33162.51822.71962.93723.17223.42593.70003.99604.31574.66105.03385.43655.87156.34126.84857.3964

7.988818.62719.3173

10.062710.867711.737112.676013.690114.785315.968217.243618.625320.115321.724546.9016

101.2571218.6064471.9548

1018.91512199.7613

123456789

101112131415161718192021222324252627282930313233343536373839405060708090

100

0.92590.85730.79380.73500.68060.63020.58350.54030.50020.46320.42890.39710.36770.34050.31520.29290.27030.25020.23170.21450.19870.18390.17030.15770.14600.13520.12520.11590.10730.09940.09200.08520.07890.07300.06760.06260.05800.05370.04970.04600.02130.00990.00460.00210.00100.0005

1.00002.0800

3.2644.50615.86667.33598.9228

10.636612.487614.486616.645518.977121.495324.214927.152130.324333.750237.450241.446345.762050.422955.456860.893366.764873.105979.954487.350895.3388

103.9659113.2832123.3459134.2135145.9506158.6267172.3168187.1021203.0703220.3159238.9412259.0565573.7702

1253.21332720.08015886.9354

12723.938627484.5157

1.00000.48080.30800.22190.17050.13630.11210.09400.08010.06900.0601

0.5270.04650.04130.03680.03300.02960.02670.02410.02190.01980.01800.01640.0150

0.1370.01250.01140.01050.00960.00880.00810.00750.00690.00630.00580.00530.00490.00450.00420.00390.00170.00080.00040.00020.0001

.0000

1.08000.56080.38800.30190.25050.21630.19210.17400.16010.14900.14010.13270.12650.12130.11680.11300.10961.10670.10410.10190.09980.09800.09640.09500.09370.09250.09140.09050.08960.08880.08810.08750.08690.08630.08580.08530.08490.08450.08420.08390.08170.08080.08040.08020.08010.0800

0.92592.64065.02217.9622

11.365115.146219.230623.552728.055032.686937.404642.170046.950151.716556.445161.115465.710070.214474.617078.907983.079787.126491.043794.828498.4789

101.9941105.3742108.6198111.7323114.7136117.5661120.2925122.8958125.3793127.7466130.0010132.1465134.1868136.1256137.9668151.8263159.6766163.9754166.2736167.4803168.1050

0.92592.70925.28638.5984

12.591117.214022.420428.167034.413941.124048.262955.799063.702871.947080.505689.357998.4795

107.8514117.4550127.2732137.2900147.4907157.8618168.3905179.0653189.8753200.8104211.8615223.0199234.2777245.6275257.0625268.5764280.1633291.8179303.5351315.3103327.1391339.0177350.9423472.0814595.2931719.4648844.0811968.9033

$$$$$$$$

Futurevalueof one

?$ ?

$ ??

??$

$$

$

Presentvalueof one


of 1


a futurevalue


of 1


value


Sinkingfund

Amortization


Presentvalue of

decreaseannuity

0.92591.78332.57713.31213.99274.62295.20645.74666.24696.71017.13907.53617.90388.24428.55958.85149.12169.37199.60369.8181

10.016810.200710.371110.528810.674810.810010.935211.051111.158411.257811.349811.435011.513911.586911.6546

11.71.7211.775211.828911.878611.924612.233512.376612.442812.473512.487712.4943

Name

Description

Graphic

Formula

Periods


Appendix


Example 6

Receive $600 per year for 20 years beginning in year 30. Findaverage annual value over a 50-year evaluation period at 8%.

Principles1. Present value of an annuity2. Present value of 13. Amortization

(Present value of an annuity: 20 years at 8%) (600)(9.818) (600) = 5,890.89

(Present value of 1: 30 years at 8%) (5,890.89)(.0994) (5,890.89) = 585.44

(Amortize: 50 years at 8%) (585.44)(.0817) (585.44) = 47.85

600$

0 30Year

50



1.08001.16641.25971.36051.46931.58691.71381.85091.99902.15892.33162.51822.71962.93723.17223.42593.70003.99604.31574.66105.03385.43655.87156.34126.84857.3964

7.988818.62719.3173

10.062710.867711.737112.676013.690114.785315.968217.243618.625320.115321.724546.9016

101.2571218.6064471.9548

1018.91512199.7613

123456789

101112131415161718192021222324252627282930313233343536373839405060708090

100

0.92590.85730.79380.73500.68060.63020.58350.54030.50020.46320.42890.39710.36770.34050.31520.29290.27030.25020.23170.21450.19870.18390.17030.15770.14600.13520.12520.11590.10730.09940.09200.08520.07890.07300.06760.06260.05800.05370.04970.04600.02130.00990.00460.00210.00100.0005

1.00002.0800

3.2644.50615.86667.33598.9228

10.636612.487614.486616.645518.977121.495324.214927.152130.324333.750237.450241.446345.762050.422955.456860.893366.764873.105979.954487.350895.3388

103.9659113.2832123.3459134.2135145.9506158.6267172.3168187.1021203.0703220.3159238.9412259.0565573.7702

1253.21332720.08015886.9354

12723.938627484.5157

1.00000.48080.30800.22190.17050.13630.11210.09400.08010.06900.0601

0.5270.04650.04130.03680.03300.02960.02670.02410.02190.01980.01800.01640.0150

0.1370.01250.01140.01050.00960.00880.00810.00750.00690.00630.00580.00530.00490.00450.00420.00390.00170.00080.00040.00020.0001

.0000

1.08000.56080.38800.30190.25050.21630.19210.17400.16010.14900.14010.13270.12650.12130.11680.11300.10961.10670.10410.10190.09980.09800.09640.09500.09370.09250.09140.09050.08960.08880.08810.08750.08690.08630.08580.08530.08490.08450.08420.08390.08170.08080.08040.08020.08010.0800

0.92592.64065.02217.9622

11.365115.146219.230623.552728.055032.686937.404642.170046.950151.716556.445161.115465.710070.214474.617078.907983.079787.126491.043794.828498.4789

101.9941105.3742108.6198111.7323114.7136117.5661120.2925122.8958125.3793127.7466130.0010132.1465134.1868136.1256137.9668151.8263159.6766163.9754166.2736167.4803168.1050

0.92592.70925.28638.5984

12.591117.214022.420428.167034.413941.124048.262955.799063.702871.947080.505689.357998.4795

107.8514117.4550127.2732137.2900147.4907157.8618168.3905179.0653189.8753200.8104211.8615223.0199234.2777245.6275257.0625268.5764280.1633291.8179303.5351315.3103327.1391339.0177350.9423472.0814595.2931719.4648844.0811968.9033

$$$$$$$$

Futurevalueof one

?$ ?

$ ??

??$

$$

$

Presentvalueof one


of 1


a futurevalue


of 1


value


Sinkingfund

Amortization


Presentvalue of

decreaseannuity

0.92591.78332.57713.31213.99274.62295.20645.74666.24696.71017.13907.53617.90388.24428.55958.85149.12169.37199.60369.8181

10.016810.200710.371110.528810.674810.810010.935211.051111.158411.257811.349811.435011.513911.586911.6546

11.71.7211.775211.828911.878611.924612.233512.376612.442812.473512.487712.4943

Name

Description

Graphic

Formula

Periods


Appendix


Example 7

A farmer considers planting an acre of trees to sale asChristmas trees. It will take 10 years before the treeswill be of marketable value. At that time a net return of$500 per acre can be expected. The present net returnon this land is $30 per acre. How can these two alter-natives be evaluated so the farmer can make his deci-sion? It is assumed 10% interest will be applicable.

Return without trees

(Present value of an annuity of 1, 10 years at 10%) (30)(6.1446) (30) = 184.34

Return with trees(Present value of 1, 10 years, at 10 %) (500)(.3855) (500) = 192.77

Difference (or expected change in return)192.77–- 184.34 = 8.43

$

wo/trees

0Year

10 10

$

w/trees

500

0Year



1.10001.21001.33101.46411.61051.77161.94872.14362.35792.59372.85313.13843.45233.7975

4.177724.59505.05455.55996.11596.72757.40028.14038.95439.8497

10.834711.918213.110014.421015.863117.449419.194321.113823.225225.547728.102430.912734.003937.404341.144845.2593

117.3909304.4816789.7470

2048.40025313.0226

$$$$$$$$$

123456789

101112131415161718192021222324252627282930313233343536373839405060708090

100

0.90910.82640.75130.68300.62090.56450.51320.46650.42410.38550.35050.31860.28970.26330.23940.21760.19780.17990.16350.14860.13510.12280.11170.10150.09230.08390.07630.06930.06300.05730.05210.04740.04310.03910.03560.03230.02940.02670.02430.02210.00850.00330.00130.00050.00020.0001

1.00002.10003.31004.64106.10517.71569.4872

11.435913.579515.937418.531221.384324.522727.975031.772535.949740.544745.599251.159157.275064.002571.402779.543088.497398.3471

109.1818121.0999134.2099148.6309164.4940181.9434201.1378222.2515245.4767271.0244299.1268330.0395364.0434401.4478442.5926

1163.90853034.81647887.4696

20474.002153120.2261$$$$$$$$$

1.00000.47620.30210.21550.16380.12960.10540.08740.07360.06270.05400.04680.04080.03570.03150.02780.02470.02190.01950.01750.01560.01400.01260.01130.01020.00920.00830.00750.00670.00610.00550.00500.00450.00410.00370.00330.00300.00270.00250.00230.00090.00030.0001

.0000

.0000

.0000

1.10000.57620.40210.31550.26380.22960.20540.18740.17360.16270.15400.14680.14080.13570.13150.12780.12470.12190.11950.11750.11560.11400.11260.11130.11020.10921.10830.10750.10670.10610.10550.10500.10450.1041

0.140370.10330.1030

.0.10270.10250.10231.10090.10030.10010.10000.10000.1000

0.90912.56204.81597.5480

10.652614.039417.631521.363625.180529.035932.891336.714940.480544.167247.758151.240154.603557.841060.947663.920566.758269.460872.029474.466076.773478.955081.014582.956184.784286.503588.118689.634291.055092.385993.631394.795995.884096.899997.847898.7316

104.8037107.6682108.9744109.5558109.8099109.9195

0.90912.64465.13158.3013

12.092116.447421.315826.650732.409838.554345.049451.863158.966466.333173.939281.762989.784597.9859

106.3508114.8644123.5131132.2846141.1678150.1526159.2296168.3905177.6278186.9343196.3039205.7309215.2099224.7362234.3057243.9143253.5584263.2349272.9408282.6735292.4304302.2095400.8519500.3284600.1266700.0488800.0188900.0073

Futurevalueof one

?$ ?

$ ??

??$

$$

$

Presentvalueof one


of 1


a futurevalue


of 1


value


Sinkingfund

Amortization


Presentvalue of

decreaseannuity

0.90911.73552.48693.16993.79084.35534.86845.33495.15906.14466.49516.81377.10347.36677.60617.82378.02168.20148.36498.51368.64878.77158.88328.98479.07709.16099.23729.30669.36969.42699.47909.52649.56949.60869.64429.67659.70599.73279.75709.77919.91489.96729.98739.99519.99819.9993

Name

Description

Graphic

Formula

Periods


Appendix


Example 8

A farmer’s deteriorating pasture yields a net return of$0.50 per acre. It will cost $10 per acre to reseed thepasture. The newly seeded acre will be out of produc-tion two years to permit the grass to become estab-lished. It will take an additional eight years for thepasture to reach its full productivity. At this time a netreturn of $6 per acre can be expected. Once estab-lished, the pasture under good management will havea permanent life. Can this cost be justified? A 10%interest rate is used. Use an evaluation period of 50years.

A. Underestablishment(present value of increasing annuity: 8 years at10%) (618 years) = 16.02(present value of 12 years at 10%) (16.02)(.8264)(16.02) = 13.24Expected return is $13.34 per acre

$

wo/seeding

0Year

50

.50

6

10

A B

50

$

w/seeding

0 2

Year

B. Fully established(present value of an annuity: 40 years at 10%)($6)(9.7791)(6) = 58.67(present value of 1: 10 years at 10%) (58.67)(.3855) (58.67) = 22.62Expected return is $22.62

Once established return is 13.34 + 22.62 = $35.86Current return(present value of an annuity: 50 years at 10%)(.50)(9.91481)(.50) =4.96

Difference or change in return is 35.86 - 4.96 = $30.90Net Benefit = 30.90 -10 = 20.90 with seeding



1.10001.21001.33101.46411.61051.77161.94872.14362.35792.59372.85313.13843.45233.7975

4.177724.59505.05455.55996.11596.72757.40028.14038.95439.8497

10.834711.918213.110014.421015.863117.449419.194321.113823.225225.547728.102430.912734.003937.404341.144845.2593

117.3909304.4816789.7470

2048.40025313.0226

$$$$$$$$$

123456789

101112131415161718192021222324252627282930313233343536373839405060708090

100

0.90910.82640.75130.68300.62090.56450.51320.46650.42410.38550.35050.31860.28970.26330.23940.21760.19780.17990.16350.14860.13510.12280.11170.10150.09230.08390.07630.06930.06300.05730.05210.04740.04310.03910.03560.03230.02940.02670.02430.02210.00850.00330.00130.00050.00020.0001

1.00002.10003.31004.64106.10517.71569.4872

11.435913.579515.937418.531221.384324.522727.975031.772535.949740.544745.599251.159157.275064.002571.402779.543088.497398.3471

109.1818121.0999134.2099148.6309164.4940181.9434201.1378222.2515245.4767271.0244299.1268330.0395364.0434401.4478442.5926

1163.90853034.81647887.4696

20474.002153120.2261$$$$$$$$$

1.00000.47620.30210.21550.16380.12960.10540.08740.07360.06270.05400.04680.04080.03570.03150.02780.02470.02190.01950.01750.01560.01400.01260.01130.01020.00920.00830.00750.00670.00610.00550.00500.00450.00410.00370.00330.00300.00270.00250.00230.00090.00030.0001

.0000

.0000

.0000

1.10000.57620.40210.31550.26380.22960.20540.18740.17360.16270.15400.14680.14080.13570.13150.12780.12470.12190.11950.11750.11560.11400.11260.11130.11020.10921.10830.10750.10670.10610.10550.10500.10450.1041

0.140370.10330.1030

.0.10270.10250.10231.10090.10030.10010.10000.10000.1000

0.90912.56204.81597.5480

10.652614.039417.631521.363625.180529.035932.891336.714940.480544.167247.758151.240154.603557.841060.947663.920566.758269.460872.029474.466076.773478.955081.014582.956184.784286.503588.118689.634291.055092.385993.631394.795995.884096.899997.847898.7316

104.8037107.6682108.9744109.5558109.8099109.9195

0.90912.64465.13158.3013

12.092116.447421.315826.650732.409838.554345.049451.863158.966466.333173.939281.762989.784597.9859

106.3508114.8644123.5131132.2846141.1678150.1526159.2296168.3905177.6278186.9343196.3039205.7309215.2099224.7362234.3057243.9143253.5584263.2349272.9408282.6735292.4304302.2095400.8519500.3284600.1266700.0488800.0188900.0073

Futurevalueof one

?$ ?

$ ??

??$

$$

$

Presentvalueof one


of 1


a futurevalue


of 1


value


Sinkingfund

Amortization


Presentvalue of

decreaseannuity

0.90911.73552.48693.16993.79084.35534.86845.33495.15906.14466.49516.81377.10347.36677.60617.82378.02168.20148.36498.51368.64878.77158.88328.98479.07709.16099.23729.30669.36969.42699.47909.52649.56949.60869.64429.67659.70599.73279.75709.77919.91489.96729.98739.99519.99819.9993

Name

Description

Graphic

Formula

Periods


Appendix B Breakeven Analysis

Problem 1 Nutrient Management

Breakeven costs—How much can a rancher affordto spend on stock water development if the trough lifeis 20 years, the interest rate is 8 percent and the valueof the increase in animal units produced each year is$140?

Solution—Breakeven cost is the value of benefittimes the present value of an annuity of 1

$140 x 9.81815 = $1,375

Breakeven time—How long will it take to recoverthe cost of an nutrient management system costing$90,000 with an 8 percent interest rate, and fertilizersavings of $50 per acre on 200 acres?

Solution—The value of the alternative is $50 per acretimes 200 acres or $10,000 per year. The cost is$90,000. Divide the cost by the value or $90,000/$10,000 = 9. Solve for the present value of an annuityof 1 per year factor and read down the list of factorsfor 8 percent to find a factor of 9 and read across tothe number of years. The answer is between 16 to 17years, so the breakeven time is 17 years.

Breakeven interest rate—What is the return on aninvestment for an alternative that costs $ 1,000, over20 years, and the reduced operating costs are $180 peryear?

Solution—Solve for the present value of an annuityof 1 per year factor and read across the interest tablesto find the interest rate. The annuity value is $180 peryear and the cost is $1,000. Therefore, the presentvalue of an annuity of 1 per year factor for the breakeven interest rate is $1,000 divided by $180 or 5.555.Reading across interest tables we find that factor for20 years the closest to but not less that 5.555 is5.62777 for 17 percent.

Breakeven Value—What must a 14 ton load of ma-nure be worth in fertilizer value in order to haul it fivemiles, if the cost of hauling is $30 per mile for 5 yearsat 8 percent interest?

Solution—Cost times amortization factor of 5 yearsat 8 percent divided by years. Five miles times $30 permile is $150 cost.($150 x .25046)/5 = $7.51 per load

Economic evaluation of alternatives produce informa-tion that can be used by decisionmakers to determinefeasibility and /or the most desirable alternative. Inany evaluation, four variables must be considered:

• Cost of installation, including operation andmaintenance

• The time period which the alternative will beevaluated

• Interest rate used for the evaluation• Benefits from the alternative

If all four variables are known, the benefits from thealternative can be compared to the cost of installingthe alternative. If three variables are known the fourthvariable can be calculated. This is called breakevenanalysis. If cost is unknown you are solving the ques-tion, how much can I afford to spend? If the timeperiod is unknown you are answering the question,how long will it take to get my money back? If theinterest rate is unknown you are asking the question,what rate of return will I get on my money if I installthe alternative? Lastly, if the benefits are unknown,you are asking the question, how much net gain do Ineed to justify spending the money to install the alter-native?


Appendix

B–2 (200-vi, NREH, draft, June 2001)

Problem 2 Farm Management

Breakeven analysis provides useful information whensmall changes in specific conservation situations arebeing evaluated. Breakeven techniques can be used todetermine how much of an investment is economicallyjustified. It can also help producers answer questionslike:

• How much can I afford to spend?• How long will it take to get my money back?• What rate of return will I get?• How much net gain do I need?

Each of the above questions involves solving for anunknown variable, cost, time, interest rate, and ben-efits, respectively. Each question can be answered ifthe other three variables are known. Three of thefollowing four pieces of information must be known inorder to solve for the other:

• Cost – cost of applying the conservation• Time – the life span or useful life of the practice• Interest rate – producer’s borrowing rate or rate

of return desired• Benefits – the change in yield or net returns

created by conservation

Breakeven value (benefit) needed to replace an

acre of production with another alternative or

practice.

First solve for value of production per acre = income -expenses. Then solve for the portion of that crop inthe rotation and sum the values for all crops to get theaverage value of production per acre. The alternativeuse needs to have net returns equal to or greater thanthe current use.

Calculations—Crop rotation over 6 years is 4 yearshaylage and 2 years of corn silage (1/3 of time in comand 2/3 of time in hay).

Haylage is 6.3 tons per acre times $37 per ton less $200operating expense times two-thirds of rotation time

$233.10–$200 x .67 = $22.17 per acre return

Corn silage is 17.5 tons per acre per year times $25.50per ton less $240 per acre times a third of rotation time

$446.25–$240 x .33 = $68.06

Average per acre value of production is $22.17 plus$68.06 or $90.23 per year

The alternative for that acre needs to provide returnsor benefits of $90.23 or more per acre for the producerto profit from the change.

If an acre of land on the farm was used for a wastewa-ter treatment facility, the income would be lost fromthat land to install the filter area. The benefits from thefilter would need to be filter greater than the loss ofproduction. For a dairy farm, they might go into afurther level of analysis with the details to convert thecrop to feed on a dry matter basis to calculate the milkproduction per acre of land to determine the milkincome per acre.

All prices and yields are state averages from the Penn-sylvania Agricultural Statistics. The operating ex-penses per acre are from Pennsylvania State Univer-sity enterprise budgets.

B–3(200-vi, NREH, draft, June 2001)


Appendix

Problem 3 Forested Buffer

A farm is considering a forested buffer that wouldtake part of a field. The time value of money needsto be considered, so look at a 7 percent rate ofreturn over 20 years.

First solve for value of production per acre, which isincome less expenses. Then solve for the portion ofthat crop in the rotation and sum the values for allcrops to get the average value of production peracre. The alternative use needs to have net returnsequal to or greater than the current use.

Calculations—Crop rotation over 6 years is 4years hay and 2 years of corn grain (1/3 of time incorn and 2/3 of time in hay).

Hay is 2.44 tons per acre times $109 per ton less$200 operating expense times two-thirds of rotationtime.

$265.96 – $200 x .67= $44.19 per acre return

Corn grain is 119 bushels per acre per year times$2.65 per bushel less $240 per acre times one-thirdof rotation time

$315.35 –- $240 x .33 = $24.87

Total per acre value of production is $44.19 plus$24.87, which is $69.06 per year

The alternative for that acre needs to provide re-turns or benefits of $69.06 or more per acre for theproducer to profit from the change. The presentvalue of an annuity at 7 percent for 20 years is10.594, so this factor times the average annual netreturns can be use to calculate the total returnsneeded over the 20 year timeframe.

$69.06 x 10.594 = $731.62

If we want to harvest timber off the buffer in year 20we need a net return (income less expenses for thetimber) of $731.62 or more to make the buffereconomically justified.

What breakeven yield do I need?

If operating expenses for corn grain are $240 per acreand the corn price is $2.65 per bushel, then $240 di-vided by $2.65 equals 90 bushels per acre breakevenyield. At yields below breakeven, there are net lossesand the farmer needs to reduce expenses or look foranother alternative use for that land.

For example if yield is 80 bushels per acre, then in-come is $2.65 times 80, which is $212 less $240 ex-penses equals a $28 net loss per acre. The forestedbuffer would save $28 per acre.


Appendix

B–4 (200-vi, NREH, draft, June 2001)

Dairy farm with corn and hay rotation, 4 years Haylage and 2 years of corn silage (1/3 of time in corn and 2/3 oftime in hay) with 10 year timeframe at 7 percent. Fanner wants to use the milk value per acre to make a decision.To do this you need to convert the feed value to milk value.

Feed requirements your farmper cow are:

a Corn silage (CS) percent of ration 55 %b Corn silage moisture 65 %c Cows fed total lb dry matter 60 lbd lb of CS fed moisture (c) divided by (b) 60/.65 = 92.3e lb/cow/day (d) x (a) 92.3 x .55 = 50.8f (e) x 305 days in milk 50.8 x 305 = 15,494 lbg Dry cow fed at 1/3 amt x (e) 50.8 x .33 = 17 lbh Dry 60 days x (g ) 60 x 17 = 1,020i lb/cow/yr CS (g) + (h) 15,494 + 1,020 =16,514 lbj lb/cow/yr divided by tons/cow/yr 16,514 / 2000 = 8.3Haylage:k haylage percent of ration 45%1 haylage moisture 65%m Cows fed total lb dry matter 60n Pounds of haylage fed moisture

m divided by l 60/.65 = 92.3o lb/cow/day = (n) x percent ration 92.3 x .45 = 41.5p (o) x 365 days 41.5 x 365 = 15,147 lb/cow/yrq lb/cow/yr to tons/cow/yr 15,147/2000 = 7.5

At 20 tons per acre per year of corn silage 1 acre will support 2.4 cows.At 6 tons per acre per year of haylage 1 acre will support .95 cows.

Your farm divide yield by feed needs:Corn silage ____ tons per year yield / line j (tons/cow/year) =Haylage _____ tons per year yield / line q (tons/cow/year) =

Milk production per cow 20,000 lbMilk production per cow times (a) milk

attributed to CS 20,000 x .55 = 11,000Milk production per cow times (k)

attributed to haylage 20,000 x .45 = 9,000Milk production attributed to CS times cows

1 acre of CS will support 11,000 x 2.4 = 26,400 lb/ac of CSMilk production attributed to haylage times

number of cows 1 acre of haylage willsupport 9,000 x .95 = 8,550 lb milk value/ac

At 2/3 from hay and 1/3 from corn silage .67 x 8,550 +.33 x 26,400 = 14,440 lb milk at $13 per cwt $1,877

The benefits from the conservation needs to be $1,877 or more per acre to justify giving up the production.

Example 4 Detail conversion of crop to milk value per acre


Appendix C Buffers

Riparian Forest Buffer Installation Estimated Costs

Component Materials Unit Estimatedcost

Establishment

Preparation - mow, disking acre $12.00Light site prepPlanting 8x8 spacing; 430 trees/acre acre $495.00Tree Seedlings (Hardwoods - $1.15/seedling)

12-18' seedling with labor includedSubtotal $507.00

Maintenance

Reinforcement Seedlings 50/acre acre $58.00Planting Year 2 after establishment $58.00Total cost Planting and Establishment acre $565.00

Optional Costs

Establishment Shelters ($5.00/tree installed) acre $2,150.00Fencing (1 acre=282 linear feet) acre $564.00

Maintenance - Herbicide treatment acre $54.00Competition control - mowing acre $12.00

Labor cost included in estimates could be saved with help by volunteers for establishment.

Economic Impacts of RiparianForest Buffers

The cost impacts of riparian buffers are site specificand determined by a variety of factors. Such consider-ations as dominant-land use, landowner objectives,and opportunity costs or foregone production, dictatethe total cost that retaining or restoring riparian forestwill impose. Following are three hypothetical sce-narios that are intended to illustrate economic impactsfor typical situations in the Chesapeake Bay Water-shed - a coastal plain agricultural field, a forestry site,

and a tract of new subdivision development near anurban center. Thanks goes to Dr. Ian Hardie, Univer-sity of Maryland; John Long and Patty Engler, NRCS;and Scott Crafton, Virginia Chesapeake Bay LocalAssistance Department for their assistance and reviewof these scenarios.

This example occurs in the Coastal Plain area ofMaryland and is a hypothetical farm. The costs ofriparian forest buffers on agricultural lands includebuffer establishment, maintenance, and the opportu-nity cost of installing a buffer - foregone income fromlost production in the riparian area.


Appendix

C–2 (200-vi, NREH, draft, June 2001)

Scenario:

A 140-acre farm field located on the eastern shore ofMaryland. The landowner manages the field in a two-crop (corn, soybeans), 2-year rotation. The field has1,307 feet of perennial and intermittent streams run-ning through it. The farmer has agreed to establish a50-foot-wide forest buffer on both sides of the streamon the advice of his NRCS district conservationist. Theresult will be a 3-acre riparian buffer.

Assumptions:

• Yield over the entire field—In many cases thearea adjacent to a stream or river is consideredmarginal land because of erosion or drought-prone soils, steep or rolling slopes, poor drain-age, and low soil fertility. However, in somecases this area is influenced by the flood plainand can be highly productive. Therefore, weassume a consistent yield.

• No-existing buffer—The buffer to be establishedis calculated for both sides of stream at 50 feet.

• Land Capability Class—IIe or IIIe (few to moder-ate limitations).

• Production costs represent variable and fixedcosts.

Income to the farmer

This amount represents the cost to the producer inlost crop income. Installing a forest buffer changes theland use for a long period of time. Therefore, total netincome is the net present value (NPV), of crop incomefor 20 years, with a discount rate of 4 percent, thelength of time before one may see a return from thenew timber resource. Net income above variable andfixed costs is 1996 Crop Budgets of $84.00 per acreand assumes crop price/yields for corn ($3.60/100) andsoybeans ($7.95/35) from MD Cooperative ExtensionService. Net income is $1,141.00.

Cost of buffer establishment and maintenance

Installing a forest buffer involves site preparation, treeplanting, and some second year reinforcement plant-ing. Additional maintenance is sometimes employed toreduce competition and promote tree growth. Refer topreceding cost sheet for itemized costs.

Cost of forest buffer $565.00Total cost of riparian forest $1,706.00

buffer to the landowner

Incentive programs that reduce costs of forest

buffers to landowners

State and federal programs exist which cost-share bestmanagement practices (BMP) and the establishment ofriparian forest buffers on agricultural lands. These pro-grams can frequently be combined, or piggy-backed,into a financial assistance package. An examination ofprograms and incentives available for buffers in theBay states appears later in this chapter. Below areexamples of program combinations for each state andthe bottom-line cost over a 20-year period to theprivate landowner if these programs are used. Thesefigures are net present values for direct comparison tolandowner costs.

Maryland:

• Conservation Reserve Program (CRP)- 50% cost-share reduces buffer $283.00

installation cost (one time)- Annual rental payments - 901.00

$81 /acre (15 years)- Riparian Forest Buffer 235.00

200/6 incentive and $5maintenance (15 years)

• MD Buffer Incentive Program - 300.00$300/acre (one time)

Cost to Maryland landowner per acre 0.00The Maryland landowner makes $13.00 per acre.

Virginia:

- CRP package $1,419.0O- Woodland Buffer Filter Area 100.00 $100/acre (one time)

Cost to Virginia landowner per acre 187.00The Virginia landowner loses income per acre over a

20-year period.

Pennsylvania:

• CRP package $1,419.00• Streambank Fencing Program 00.00

(if >12-foot buffer, then fencingprovided for free)

Cost to Pennsylvania landowner per acre $287.00The Pennsylvania landowner loses income per acreover a 20-year period.

C–3(200-vi, NREH, draft, June 2001)


Appendix

Discussion• State and Federal conservation programs can

reduce or eliminate landowner costs for restor-ing riparian buffers an their land. This scenarioshows that cost-share and incentive programscan lead to break even or better over a 20-yearperiod. However, crop income opportunity is stilllost as time continues.

• Riparian forests can provide additional anddiversified economic returns to the agriculturalproducer. For example, timber that is selectivelyharvested can still provide annual equivalent of$8.00/acre (red oak - 60-year rotation) to $34.00per acre (loblolly pine - 35-year rotation). Also,allowing hunting access can return $3.00 to $5.00in lease fees per acre every year

This example occurs in the Coastal Plains area ofVirginia’s western shore. It was selected because it isbased on an actual situation encountered by a leadingforest products company in the region working with aprivate landowner. The costs, or in this case the fore-gone income, to retain the forest buffer are from theprivate landowner perspective.

Scenario

A 54-acre land parcel in private non-industrial landownership located in the Middle Neck region of Vir-ginia. It is a mixed pine/hardwood site with 3,920 feetof perennial stream running through the area sched-uled for timber harvesting. A local ordinance requiresa 50-foot wide buffer or streamside management zoneto protect water quality. The result is a 4.5 acre totalarea impacted by retaining the buffer.

Income from Timber Production:Income figures are shown per acre. Reforestation isoptional in this region because natural regenerationoccurs well on these sites. The reforestation cost isincluded to show potential costs to the landowner, andit assumes that they may choose selected speciesmanagement.

Gross Timber Income (per acre) $1,268.00Production Costs to Landowner – 634.00(per acre) Harvest - payment tologger (estimate of labor, equip-ment maintenance, hauling, insur-ance, FOB)Reforestation - species enhance- – 200.00ment/management (optional)Net income to landowner $434.00

Cost of a buffer to the landowner

The figures below show the income potential of theentire 54-acre land parcel and the impact of lost in-come for using alternative harvesting techniqueswithin the 4.5-acre forest buffer. The preferred man-agement approach is to clear cut the entire parcel.Each alternative harvesting technique reflects theadjusted total return, the exact dollar change (loss),and percentage change in return to the landowner.Total returns were calculated at $634.00 per acre toreflect the impact of the buffer on the timber sale only.

Cost of Buffer to Landowner

Harvesting Total Changes % Changealternatives return

Total clearcut $34,250of the entireparcel

Selective cut 33,991 $259 1.00%All saw timberin buffer(>50% ba)

Selective Cut 31,602 2,649 7.70%High quality inbuffer (<50% ba)

No harvest in $28,531 $5,719 16.70%buffer

Comments on "Economic Impacts of Riparian

Forest Buffers on Agricultural Lands"


Appendix

C–4 (200-vi, NREH, draft, June 2001)

Simplify crop production section by eliminating grossannual income and annual production cost figures;simply show net annual income per acre. ReferenceUniversity of MD crop budgets for average income peracre. As we discussed, cropland entered into retire-ment programs will probably be the marginal, lessproductive acres, so the $127 per acre net incomefigure may be slightly high, although it seems to be inthe right ballpark.

With an example of installing a forest buffer throughCRP, suggest using a 15-year contract, with 15 annualpayments ranging from $23 to 102 per acre. Suggestdiscounting all annual, dollars per acre values to alump-sum NPV, so a comparison with the one-time,lump-sum BIP payment or other one-time paymentscan be made. Use a 30-year time period for discountingthe lost crop income because there is a 30-year liferequirement for the forest buffer.

Example: CRP in Talbot County• $81/acre for 15 years = $797/acre NPV (at 6%).• Discount net annual income as well ($127/acre

for 30 years = $1,748/acre NPV).• Factor in 20 percent incentive payment for

buffers through CRP, and $5/acre maintenancefee: $5/acre+$16,20/acre = $21.20/acre. $21.20/acre for l5 years =$206/acre NPV.

• Hunting lease income: $5/acre for 30 years = $69/acre NPV

Under this scenario:Total NPV

Lost income (30 yrs) ($1,748)Buffer installment (one-time) 200

(50% cost-shared from CRP)CRP annual rental payments (15 yrs) $797CRP maint. and inc. payments (15 yrs) $206BIP payment (one-time) $300Hunting lease income (30 yrs) $69

($586)

This analysis shows that there would be a net loss tothe producer. However, a producer receiving $127 peracre in income from planting crops probably wouldn’tenroll in CRP for only $81 an acre. The producerwould probably only accept as much from CRP as theycould get otherwise. Suggest setting up the scenario sothat the crop income and the CRP rental rate wereequal to $81 per acre.

NPVLost income (30 yrs) ($1,115)Buffer installment (one-time) (200)(50% cost-shared from CRP)CRP annual rental payments (15 yrs) 787CRP maint. and inc. payments (15 yrs) 206BIP payment (one-time) 300Hunting lease income (30 yrs) 92Net $47

This scenario is also in line with the above commentthat the majority of cropland enrolled in CXP or otherretirement programs will be marginally productive.

General comments

Round all dollars per acre figures to whole dollaramounts. Specify in a column header that these figuresare dollars per acre. Only show numbers in dollars peracre NPV so all numbers within the column can beeasily compared. Have entire analysis on one page tofacilitate cast of review.

usdapart 610 conservation planning national resources economics handbook (200-vi, nreh, draft, june...

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