ECONOMIC FEASIBILITY ANALYSIS IN AQUACULTUREMany methods can be used to evaluateinvestment feasibility.All the methods are only for decision makingand cannot be substituted for judgments onfactors that cannot be quantified.
The important methods Pay back period method Average rate of return method Discounting method » Present value method Net present value method Internal rate of return Benefit – cost method
PAY BACK PERIOD METHOD• It’s also referred to as “pay off “• Time required to recover the initial investment out of the expected earnings from the investment before any allowance for depreciation• T=C/E• T payback period• C initial investment• E Average annual profit expected from the investment
• Pay back period can be calculated in two different situations When annual cash inflow is uniform When annual cash inflow is unequalADVANTAGES It’s simple to understand and easy to apply It takes into account liquidity It minimizes the possibility of losses through obsolescenceDISADVANTAGES• It ignores the time value of money• It completely ignores cash inflows after the pay back period• It does not measure the profitability
AVERAGE RATE OF RETURN METHOD• Ratio of the average annual profits expected after depreciation divided by the projects initial investment• R = E/C R – average annual rate of return E _ average annual profit expected after depreciation C _ initial investment
ADVANTAGES Easy to calculate and simple to understand It consider the entire earnings of the project It; s based on the accounting concept of profit DISADVANTAGES This method ignores time value of money It ignores life span of various investment It takes into account only the accounting profit and not cash flows
• DISCOUNTING METHOD• Time value of money taken into account• A rupee received today is more valuable than the rupee received tomorrow• It’s the process of finding out the present value of future dates• Discounted cash flow methods are superior to the traditional method » They take cash inflows during the entire life of the project. » Time value of money is taken.
• The discounting method can used to evaluate the economic feasibility analysis by private sector and public sectors• When used by private sector the method is usually referred to as “financial analysis”• When used by the public sector it’s often called “economic or social analysis”
FINANCIAL ANALYSIS.• Estimation of the capital costs and the timing of the capital costs over the life of the project.• Estimation of the annual operating costs for various inputs.• Estimation of annual revenue based on the expected yield and price.
ECONOMIC(SOCIAL)ANALYSIS.• Investment decisions made by government agencies that are based exclusively on business criteria may not be satisfactory.• It should be analyzed from societies point of view. • Estimation of direct benefits. • Estimation of direct costs. • Estimation of indirect effects. • Estimation of secondary benefits & costs. • Selection of social rate of discount.
METHODS OF FINANCIAL & ECONOMICAL ANALYSIS .• Major discounting methods are, • Net present value method. • Internal rate of return. • Benefit-cost.
NET PRESENT VALUE METHOD.• Difference between present value in cash inflows and present value in cash outflows. PROCEDURE FOR FINDING OUT THE NPV.• Determine a suitable rate of interest.• Compute the present value of all cash outflows.• Excess of total present value of cash inflows over the total present value of cash out flows represent NPV.• Accept the project if it is NPV is greater than or equal to zero, reject when it is negative.
• NPV is calculated as,• NPV=A1/(1+r)1+A2/(1+r)2+………..+An/ (1+r)n• NPV >0 investment would be profitable• NPV<0 investment would not be profitable• NPV =0 it would be a break even situation
ADVANTAGES• NPV method considers the total inflow during the entire life of the project• It’s based on profitability rather than liquidity• It takes time value of money into account DISADVANTAGES• Computation of net present value is rather difficult process• Life of asset is totally ignored
BENEFIT –COST RATIO• It’s the ratio of the total present value of benefits to the costs• Two kinds of benefit-cost ratio; NET BENEFIT – COST RATIO GROOSS BENIFT -COST RATIO• Benefit- cost ratio greater than 1 or the highest among alternative investment is feasible .
• ADVANTAGES• It’s very scientific and logic• It consider fair rate of return• It’s very useful to compare the projects having different investments• DISADVANTAGES• Its comparatively difficult to understand and follow• It’s difficult to estimate the estimate the effective life of a project.• This method is not in accordance with the accounting principles and concepts.
INTERNAL RATE OF RETURN METHOD.• IRR is the discounts rate which equals the present value of cash inflows with the present value of cash outflows.• IRR can be calculated by two ways,By computing the rate of return on investment or the rate of return on equity.
ADVANTAGES• IRR method takes time value of money into account.• It takes into account on the entire earnings over the economic life asset.• Cost of capital is considered for decision making.DISADVANTAGES.• The process of computation of IRR is rather difficult.• It does not consider the variation in the life span assets• The method ignores the aspect of liquidity.