Animal health economics - assessing change Flashcards
Commonest methods of assessing change in livestock systems
- partial budget analysis
- investment approasal (referred to as cost-benefit analysis for regional or national assessments)
- other tools incorporate risk (sensitivity analysis and decision tree analysis)
Use - partial budgeting
- to assess small changes in farming systems, a livestock sector enterprise or an existing organisation.
- most commonly when considering a new input, enterprse or farm ractice (e.g new medication)
- its conceptual basis is used when introducing time into analysis to assess change
What to do if partial budgeting costs/benefits occur in different time periods
- introduce discounting
Result of partial budgeting
A marginal analysis not designed to show the profit or loss of the farm as a whole but the net increase or decrease in net farm income resulting from proposed changes. It compares marginal costs versus marginal benefits.
What is partial budgeting based on?
expect values
4 components of partial budget
COSTS: new costs, revenue foregone
BENEFITS: costs saved, new revenue
What is a partial budget not capable of?
- not capable of examining seasonal resource flows
- unsuitable for enterprises that have irregular or lumpy outputs/inputs
Why is partial budget restricted?
carried out for a year or a production cycle
How do you assess a change inmanagement or investmaent that affects outputs over a number of years?
investment appraisal (known as cost-benefit analysis for regional and national assessments)
How is an investment appraisal different to partial budget?
it uses basic framework of partial budgets (costs and benefits of change) but note WHEN these occur (thus adds the concept of the time value of money)
What is discounting?
converting future money values into current present value (e.g. something worth £121,000 in 2 years time that is worth £100,000 now if invested with 10% interest.). Discounting requires a rate known as a discount rate. This doesn’t necessarily equate to the rate of interest offered at banks.
FOrmula - discounting
a basic principle is that a £ now is worth more than a £ to be received some time in the future because that (present) £ received can be invested at interest to accumulate more than its original value.
T/F: when all benefits and costs are converted to present values it is possible to compare them
True - commonly done using three decision-making criteria: net-present value, internal rate of return and the benefit-cost ratio. These have strengths/weaknesses, thus common to present the results of an investment appraisal with all 3 measures of project worth - indicate the economic profitability of an investment
When is financial feasibility evaluated?
once economic profitability of various investments have been analysed and alternative chose.
Aim - financial feasibility analysis
determine whether/not the investment project witll generate sufficient cash income to make the principal and interest payments on the borrowed funds used to purchase the asset.
When is financial feasibility analysis unnecessary?
if the asset is purchased with money that does not need to be borrowed (i.e. equity).
Steps - financial feasibilty
- determine the annual net cash flows for the investment. These should be available from the economic feasibility
- determine the annual principal and interest payments based on the loan repayment schedule
- compare the annual cash flow with the annual principal and interest repayments
Outcome - the investment produces a cash surplus
it will be able to meet the loan repayments and can be classes as financially and economically feasible
What does a cash deficit mean?
the investment is not financially feasible. This does not mean the investment should not take place, it simply means the servicing of the loan will meet with problems
When is sensitivity analysis used?
where uncertainty exists about prices of both inputs and outputs and where there is variation in the level of outputs d/t environmental factors. (a range of figures is provided for the parameteres that are uncertain and the worst /best scenarios for the project or activity are used to perform separate gross margin analysis, partial budgets or cost-benefit analyses)
What is the output of the sensitivity analysis used for?
to determine how sensitive a project or activity is to changes in the costs and benefits that cannot be given definite values. Thus used to estimate risk of the activity and indicate which prices/production levels have greatest impact on profitability.
What is break0even analysis?
a form of sensitivity analysis where the search is for a value of a parameter, be it a price or a level of output, which will produce a zero profit or net present value. This technique can be modified to produce an answer which would produce an output value which is an acceptable threshold
What is decision analysis?
for formally analysing complicated decisions which invole a sequential series of actions and chance events. Three aspects within decision are identified:
- the events which a decision maker can control such as vaccination, treatment of animal or culling of animals
- probability of occurrence of chance events (virus entry to farm etc)
- the value of various outcomes, normally but not necessarily expressed in monetray terms
* once these 3 items are identified, a quantitative analysis is performed, using either pay-off tables and/or decision trees.
T/F: all pay-off tables can be presented as decision trees
True
