Basic Economics for Natural Resource Managers Hal Gordon

Basic Economics for Natural Resource Managers Hal Gordon, NRCS WNTSC Portland, Oregon

Why Farm or Ranch? n Lifestyle n Income Business n Real Estate Market

What is Needed for Economic Analysis? n A Resource Problem to Solve n A Decision to Make n Decision Makers Goals & Objectives n Physical & Economic Resource Data n Potential Solutions

Resource Problems/Concerns Soil – Erosion, Deposition, Condition Typically caused by Humans Water – Quantity, Quality, Irrigation, Flood, Drought Air – Quality, Condition Plant – Productivity, Suitability, Condition Animal – Habitat, Management, Livestock, Wildlife Human – Labor, Management, Risk, Profitability

Land User’s Objectives Social Economic Environmental

Inventory/Analyze Resources Soil – Soil Survey, Land Improvements, Structures Water - Irrigation Systems, Livestock/Wildlife Facilities Air - Wind Erosion, Quality, Odor Plant - Crop/Forage/Timber Production Animal - Livestock, Wildlife Habitat Human - Labor, Management, Capitol, Community, Social * Estimate both Current and Future Conditions

Formulate/Evaluate Alternatives Scoping Wildlife Pests Air Quality Cultural Resources Income Irrigation Flooding Water Quality Government Farm Income Soil Erosion Fish Habitat Crop Yields Livestock Recreation Farm Income Water Quality Livestock

Formulate/Evaluate Alternatives Solutions n n Structural Vegetative Management Combination Soil Water Air Plants Animals Human Test of a Good Plan: 1. Complete 2. Effective 3. Efficient 4. Acceptable

Make an Informed Decision n “When faced with a tough decision, most people rely on feelings rather that thought” n “A decision is an action one must take when he has information so incomplete that the answer does not suggest itself” n “All of our knowledge is about the past; all of our decisions are about the future” Economic principles help organize information to make an informed decision

Economics… “the optimal allocation of scarce resources among competing uses” ü ü Examples of Scarce Resources? Examples of Competing Uses?

Why do Economics? • Organize Information • Helpful in Making Decisions • To Compare Benefits and Costs Good Investment = Benefits > Costs

Benefit & Cost Analysis Economic analysis requires four simple steps: 1. Estimate Costs 2. Estimate Benefits 3. Convert to “Like Terms” ($/Acre/Year) 4. Compare Costs & Benefits

Costs Fixed and Variable Costs Land Improvements Labor Machinery Operation and Management Foregone Income Financing Non-Monetary Costs

Benefits Monetary and Non-Monetary Benefits Crop/Forage/Timber Yield Increases Livestock Weight Gains Livestock Health Wildlife Recreation Healthy Environment On and Off Site Benefits

Effects for Decision Making Benchmark Condition Land Treatment (Present Condition) (Future Condition) Impacts (Things that Change) Decision Maker’s Values Benefits & Costs (T-Chart)

“T” Chart CONSERVATION TREATMENT EFFECTS INFORMATION NAME – LOCATION – DATE CONSERVATION MANAGEMENT UNIT CONSERVATION TREATMENT: “+” POSITIVE EFFECTS (Benefits) + + + RESOURCE PROBLEMS: “-” NEGATIVE EFFECTS (Costs) -

Partial Budgeting Systematically displays the Benefits and Costs n Only “things that change” are considered n Simplifies data collection n Use a “T” chart to display the “effects” n Level III Qualitative Statements Units of Measurement, Dollars Economic and Financial Analysis

“T” Chart Example Resource Problems: Plant Productivity, Erosion, Profitability Objective: Increase Forage Production Solution: Pasture Seeding, Brush & Weed Control Effects: Brush Control $50/Acre Reseed Pasture $65/Acre Discount Rate 7% Time Period 10 Years Weed Control $15/Acre/Year Forage Increase 3 AUMs/Acre/Year Forage Value $12/AUM Forage Quality Improvement Migratory Spring Goose Habitat/Grazing Reduced Erosion (2 Tons) Water Quality Improvement

Level I CONSERVATION TREATMENT EFFECTS INFORMATION NAME – H. Gordon, Rocking Raindrop LOCATION – Aloha, Oregon DATE – 5/12/2014 CONSERVATION MANAGEMENT UNIT – Pasture, Willamette Valley, Oregon CONSERVATION TREATMENT: Pasture Seeding, Brush & Weed Control “+” POSITIVE EFFECTS (Benefits) RESOURCE PROBLEMS: Plant Productivity, Erosion, Profitability “-” NEGATIVE EFFECTS (Costs)

Level I CONSERVATION TREATMENT EFFECTS INFORMATION NAME – H. Gordon, Rocking Raindrop LOCATION – Aloha, Oregon DATE – 5/12/2014 CONSERVATION MANAGEMENT UNIT – Pasture, Willamette Valley, Oregon CONSERVATION TREATMENT: Pasture Seeding, Brush & Weed Control “+” POSITIVE EFFECTS (Benefits) Forage Quality Improvement Reduced Erosion Water Quality Improvement Goose Habitat Improves Bird Watching Forage Increase RESOURCE PROBLEMS: Plant Productivity, Erosion, Profitability “-” NEGATIVE EFFECTS (Costs) Goose Habitat Increases Trespassing Brush Control Reseed Pasture Weed Control

Level II CONSERVATION TREATMENT EFFECTS INFORMATION NAME – H. Gordon, Rocking Raindrop LOCATION – Aloha, Oregon DATE – 5/12/2014 CONSERVATION MANAGEMENT UNIT – Pasture, Willamette Valley, Oregon CONSERVATION TREATMENT: Pasture Seeding, Brush & Weed Control “+” POSITIVE EFFECTS (Benefits) Forage Quality Improvement Reduced Erosion 2 Tons/Acre Water Quality Improvement Goose Habitat Improves Bird Watching Forage Increase 3 AUMs Year RESOURCE PROBLEMS: Plant Productivity, Erosion, Profitability “-” NEGATIVE EFFECTS (Costs) Goose Habitat Increases Trespassing Brush Control $50/Acre Reseed Pasture $65/Acre Weed Control $15. 00/Acre/Year

Level III CONSERVATION TREATMENT EFFECTS INFORMATION NAME – H. Gordon, Rocking Raindrop LOCATION – Aloha, Oregon DATE – 5/12/2014 CONSERVATION MANAGEMENT UNIT – Pasture, Willamette Valley, Oregon CONSERVATION TREATMENT: Pasture Seeding, Brush & Weed Control “+” POSITIVE EFFECTS (Benefits) RESOURCE PROBLEMS: Plant Productivity, Erosion, Profitability “-” NEGATIVE EFFECTS (Costs) Forage Quality Improvement Reduced Erosion 2 Tons/Acre Water Quality Improvement Goose Habitat Improves Bird Watching Forage Increase 3 AUMs Year X $12/AUM = $36/Ac/Year Goose Habitat Increases Trespassing Brush Control $50/Acre Reseed Pasture $65/Acre 7% Interest, 10 Years =. 142 X $115 = $16. 33 Annual Installation Cost = $16. 33/Acre/Year Weed Control $15. 00/Acre/Year Total Benefits = $36/Ac/Year Total Costs = $31. 33/Acre/Year Net Benefits = $4. 67/Ac/Yr

The Time Value of Money

Benefit & Cost Analysis Economic analysis requires four simple steps: 1. Estimate Costs 2. Estimate Benefits 3. Convert to “Like Terms” 4. Compare Costs & Benefits

How do we Convert to “Like Terms” when The costs are today ($/Acre) and The benefits come in the future ($/Acre/Year)? Using the… Time Value of Money

Time Value of Money “Value” depends on when you receive something Would you prefer $100 today or $100 next year? It depends on: • • • Do you trust me to pay you next year. I may not be around next year. You can invest $100 today & receive interest next year.

Time Value of Money Would you prefer to get: A. $100 today or $100 next year? B. $100 today or $110 next year? (receive 10% interest next year) C. $100 today or $95 next year? (lose 5% interest next year)

Time Value of Money Information needed: • • • Time Period (Years) Discount/Interest Rate (%) Present Value ($) Future Value ($) Payment ($)

Time Value of Money Knowing 3 variables we can solve for the 4 th variable …using simple algebra Solve for Present Value: Payment = Present Value x “Time Period & Interest Rate”

Time Value of Money Knowing 3 variables we can solve for the 4 th variable …using simple algebra Solve for Present Value: Payment = Present Value x “Time Period & Interest Rate” Payment Value “Time Period & Interest Rate” = Present

Present Value $ • One-time value • Dollars today • Installation cost Years Payment • Annuity • Annual costs • Annual benefits • O&M costs $ Years Future Value • One-time value • Dollars in the Future • Replacement cost $ Years

Discount Rate vs. Interest Rate n Cost of borrowing money, the rate charged against a loan n Includes risk and inflation

Discount Rate vs. Interest Rate n Cost of borrowing money, the rate charged against a loan n Includes risk and inflation Discount Rate n The “cost of capital” or the “market rate of return” n Rate to determine the present value of future cash flows n Includes risk and uncertainty

Payments n $ Amount Borrowed n n $ n PMT 0 1 PMT 2 Time PMT 3 PMT 4 Loan payment Spread to cost of an investment over its life Time can be in years, quarters, months Amortization or Annualizing

Payment Example – Grazing Example Watering Facilities, Pipeline, Fence Time Period Interest Rate Present Value Payment 15 Years 6 Percent $20, 000 ?

Payment Example – Grazing Example Watering Facilities, Pipeline, Fence Time Period Interest Rate Present Value Payment 15 Years 6 Percent $20, 000 ? Payment = Present Value x (Years, %)

Amortization Table Per $ of Installation Cost LIFE % INTEREST RATE YEARS 6 7 8 9 10 11 12 13 2 0. 545 0. 553 0. 561 0. 568 0. 576 0. 584 0. 592 0. 599 3 0. 374 0. 381 0. 388 0. 395 0. 402 0. 409 0. 416 0. 424 4 0. 289 0. 295 0. 302 0. 309 0. 315 0. 322 0. 329 0. 336 5 0. 237 0. 244 0. 250 0. 257 0. 264 0. 271 0. 277 0. 284 6 0. 203 0. 210 0. 216 0. 223 0. 230 0. 236 0. 243 0. 250 7 0. 179 0. 186 0. 192 0. 199 0. 205 0. 212 0. 219 0. 226 8 0. 161 0. 167 0. 174 0. 181 0. 187 0. 194 0. 201 0. 208 9 0. 147 0. 153 0. 160 0. 167 0. 174 0. 181 0. 188 0. 195 10 0. 136 0. 142 0. 149 0. 156 0. 163 0. 170 0. 177 0. 184 11 0. 127 0. 133 0. 140 0. 147 0. 154 0. 161 0. 168 0. 176 12 0. 119 0. 126 0. 133 0. 140 0. 147 0. 154 0. 161 0. 169 13 0. 120 0. 127 0. 134 0. 141 0. 148 0. 156 0. 163 14 0. 108 0. 114 0. 121 0. 128 0. 136 0. 143 0. 151 0. 159 15 0. 103 0. 110 0. 117 0. 124 0. 131 0. 139 0. 147 0. 155 16 0. 099 0. 106 0. 113 0. 120 0. 128 0. 136 0. 143 0. 151 17 0. 095 0. 102 0. 110 0. 117 0. 125 0. 132 0. 140 0. 149 18 0. 092 0. 099 0. 107 0. 114 0. 122 0. 130 0. 138 0. 146

Payment Example Watering Facilities, Pipeline, Fence Time Period 15 Years Interest Rate 6 Percent Present Value $20, 000 Payment: $20, 000 x. 103 = $2, 060/Year Payment = Present Value x (Years, %)

Payment Example – Grazing Example

Benefit & Cost Analysis Four simple steps: 1. Estimate Costs 2. Estimate Benefits 3. Convert to “Like Terms” 4. Compare Costs & Benefits

Benefit Cost Example: Improved Grazing System Step 1: Estimate Costs Watering facilities, pipeline, fencing Installation cost = $20, 000 Annual cost = $2, 060/Year Benefited area: 500 Acres = $2, 060/500 Ac = $4. 12/Ac/Yr

Benefit Cost Example: Improved Grazing System Step 1: Estimate Costs Watering facilities, pipeline, fencing Installation cost = $20, 000 Annual cost = $2, 060/Year Benefited area: 500 Acres = $2, 060/500 Ac = $4. 12/Ac/Yr Can we identify at least $4. 12/Ac/Yr benefits to off-set the costs?

Benefit Cost Example: Improved Grazing System Step 2: Estimate Benefits Increased stocking, reduced hay, etc. Forage Increase =. 50 AUMs/Acre/Year Forage Value = $16/AUM Annual Benefits = $8/Acre/Year

Benefit Cost Example: Improved Grazing System Step 2: Estimate Benefits Increased stocking, reduced hay, etc. Forage Increase =. 50 AUMs/Acre/Year Forage Value = $16/AUM Annual Benefits = $8/Acre/Year Can we obtain forage for less than $8/Ac/Yr?

Benefit Cost Example: Improved Grazing System Step 3: Convert to “like terms” Costs: $20, 000/Ac Benefits: $8/Ac/Yr

Benefit Cost Example: Improved Grazing System Step 3: Convert to “like terms” Amortization Costs: $20, 000/Ac Benefits: $8/Ac/Yr 15 year analysis 6% discount rate: Costs: $4. 12/Ac/Yr Benefits: $8/Ac/Yr

Benefit Cost Example: Improved Grazing System Step 3: Convert to “like terms” Amortization Costs: $20, 000/Ac Benefits: $8/Ac/Yr 15 year analysis 6% discount rate: Costs: $4. 12/Ac/Yr Benefits: $8. 00/Ac/Yr

Benefit Cost Example: Improved Grazing System Step 4: Compare Benefits and Costs Benefits: Costs: Net Benefit: $8. 00/Ac/Yr - $4. 12/Ac/Yr $3. 88/Ac/Yr Benefits > Costs? Yes

Break-Even Analysis Question: What is my annual cost? How much can I afford to pay? How many years to break-even? Return on the investment? Solve for: Payment Present Value Years Interest Rate Payment = Present Value x (Years, %)

Question: What is my annual cost? What is my annual cost for a $10, 000 irrigation pump, that lasts 5 years, and I can get a loan for 8% interest? Solve for: Payment % INTEREST RATE LIFE YEARS 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 25 30 50 100 3 0. 523 0. 354 0. 269 0. 218 0. 185 0. 161 0. 142 0. 128 0. 117 0. 108 0. 100 0. 094 0. 089 0. 084 0. 080 0. 076 0. 073 0. 070 0. 067 0. 051 0. 039 0. 032 4 0. 530 0. 360 0. 275 0. 225 0. 191 0. 167 0. 149 0. 134 0. 123 0. 114 0. 107 0. 100 0. 095 0. 090 0. 086 0. 082 0. 079 0. 076 0. 074 0. 064 0. 058 0. 047 0. 041 5 0. 538 0. 367 0. 282 0. 231 0. 197 0. 173 0. 155 0. 141 0. 130 0. 120 0. 113 0. 106 0. 101 0. 096 0. 092 0. 089 0. 086 0. 083 0. 080 0. 071 0. 065 0. 050 6 0. 545 0. 374 0. 289 0. 237 0. 203 0. 179 0. 161 0. 147 0. 136 0. 127 0. 119 0. 113 0. 108 0. 103 0. 099 0. 095 0. 092 0. 090 0. 087 0. 078 0. 073 0. 060 7 0. 553 0. 381 0. 295 0. 244 0. 210 0. 186 0. 167 0. 153 0. 142 0. 133 0. 126 0. 120 0. 114 0. 110 0. 106 0. 102 0. 099 0. 097 0. 094 0. 086 0. 081 0. 072 0. 070 8 0. 561 0. 388 0. 302 0. 250 0. 216 0. 192 0. 174 0. 160 0. 149 0. 140 0. 133 0. 127 0. 121 0. 117 0. 113 0. 110 0. 107 0. 104 0. 102 0. 094 0. 089 0. 082 0. 080 9 0. 568 0. 395 0. 309 0. 257 0. 223 0. 199 0. 181 0. 167 0. 156 0. 147 0. 140 0. 134 0. 128 0. 124 0. 120 0. 117 0. 114 0. 112 0. 110 0. 102 0. 097 0. 091 0. 090 10 0. 576 0. 402 0. 315 0. 264 0. 230 0. 205 0. 187 0. 174 0. 163 0. 154 0. 147 0. 141 0. 136 0. 131 0. 128 0. 125 0. 122 0. 120 0. 117 0. 110 0. 106 0. 101 0. 100 11 0. 584 0. 409 0. 322 0. 271 0. 236 0. 212 0. 194 0. 181 0. 170 0. 161 0. 154 0. 148 0. 143 0. 139 0. 136 0. 132 0. 130 0. 128 0. 126 0. 119 0. 115 0. 111 0. 110 12 0. 592 0. 416 0. 329 0. 277 0. 243 0. 219 0. 201 0. 188 0. 177 0. 168 0. 161 0. 156 0. 151 0. 147 0. 143 0. 140 0. 138 0. 136 0. 134 0. 127 0. 124 0. 120

Question: What is my annual cost? What is my annual cost for a $10, 000 irrigation pump, that lasts 5 years, and I can get a loan for 8% interest? Solve for: Payment % INTEREST RATE LIFE YEARS 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 25 30 50 100 Payment = Present Value x (Years, %) Payment = $10, 000 x. 250 $2, 500/Year = $10, 000 x. 250 3 0. 523 0. 354 0. 269 0. 218 0. 185 0. 161 0. 142 0. 128 0. 117 0. 108 0. 100 0. 094 0. 089 0. 084 0. 080 0. 076 0. 073 0. 070 0. 067 0. 051 0. 039 0. 032 4 0. 530 0. 360 0. 275 0. 225 0. 191 0. 167 0. 149 0. 134 0. 123 0. 114 0. 107 0. 100 0. 095 0. 090 0. 086 0. 082 0. 079 0. 076 0. 074 0. 064 0. 058 0. 047 0. 041 5 0. 538 0. 367 0. 282 0. 231 0. 197 0. 173 0. 155 0. 141 0. 130 0. 120 0. 113 0. 106 0. 101 0. 096 0. 092 0. 089 0. 086 0. 083 0. 080 0. 071 0. 065 0. 050 6 0. 545 0. 374 0. 289 0. 237 0. 203 0. 179 0. 161 0. 147 0. 136 0. 127 0. 119 0. 113 0. 108 0. 103 0. 099 0. 095 0. 092 0. 090 0. 087 0. 078 0. 073 0. 060 7 0. 553 0. 381 0. 295 0. 244 0. 210 0. 186 0. 167 0. 153 0. 142 0. 133 0. 126 0. 120 0. 114 0. 110 0. 106 0. 102 0. 099 0. 097 0. 094 0. 086 0. 081 0. 072 0. 070 8 0. 561 0. 388 0. 302 0. 250 0. 216 0. 192 0. 174 0. 160 0. 149 0. 140 0. 133 0. 127 0. 121 0. 117 0. 113 0. 110 0. 107 0. 104 0. 102 0. 094 0. 089 0. 082 0. 080 9 0. 568 0. 395 0. 309 0. 257 0. 223 0. 199 0. 181 0. 167 0. 156 0. 147 0. 140 0. 134 0. 128 0. 124 0. 120 0. 117 0. 114 0. 112 0. 110 0. 102 0. 097 0. 091 0. 090 10 0. 576 0. 402 0. 315 0. 264 0. 230 0. 205 0. 187 0. 174 0. 163 0. 154 0. 147 0. 141 0. 136 0. 131 0. 128 0. 125 0. 122 0. 120 0. 117 0. 110 0. 106 0. 101 0. 100 11 0. 584 0. 409 0. 322 0. 271 0. 236 0. 212 0. 194 0. 181 0. 170 0. 161 0. 154 0. 148 0. 143 0. 139 0. 136 0. 132 0. 130 0. 128 0. 126 0. 119 0. 115 0. 111 0. 110 12 0. 592 0. 416 0. 329 0. 277 0. 243 0. 219 0. 201 0. 188 0. 177 0. 168 0. 161 0. 156 0. 151 0. 147 0. 143 0. 140 0. 138 0. 136 0. 134 0. 127 0. 124 0. 120

Question: How much can I afford to pay? Solve for: Present Value % INTEREST RATE How much can I afford to pay for brush control that will last 10 years, increase my grazing income by $3, 000/year, and I can get a loan for 6% interest? LIFE YEARS 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 25 30 50 100 3 0. 523 0. 354 0. 269 0. 218 0. 185 0. 161 0. 142 0. 128 0. 117 0. 108 0. 100 0. 094 0. 089 0. 084 0. 080 0. 076 0. 073 0. 070 0. 067 0. 051 0. 039 0. 032 4 0. 530 0. 360 0. 275 0. 225 0. 191 0. 167 0. 149 0. 134 0. 123 0. 114 0. 107 0. 100 0. 095 0. 090 0. 086 0. 082 0. 079 0. 076 0. 074 0. 064 0. 058 0. 047 0. 041 5 0. 538 0. 367 0. 282 0. 231 0. 197 0. 173 0. 155 0. 141 0. 130 0. 120 0. 113 0. 106 0. 101 0. 096 0. 092 0. 089 0. 086 0. 083 0. 080 0. 071 0. 065 0. 050 6 0. 545 0. 374 0. 289 0. 237 0. 203 0. 179 0. 161 0. 147 0. 136 0. 127 0. 119 0. 113 0. 108 0. 103 0. 099 0. 095 0. 092 0. 090 0. 087 0. 078 0. 073 0. 060 7 0. 553 0. 381 0. 295 0. 244 0. 210 0. 186 0. 167 0. 153 0. 142 0. 133 0. 126 0. 120 0. 114 0. 110 0. 106 0. 102 0. 099 0. 097 0. 094 0. 086 0. 081 0. 072 0. 070 8 0. 561 0. 388 0. 302 0. 250 0. 216 0. 192 0. 174 0. 160 0. 149 0. 140 0. 133 0. 127 0. 121 0. 117 0. 113 0. 110 0. 107 0. 104 0. 102 0. 094 0. 089 0. 082 0. 080 9 0. 568 0. 395 0. 309 0. 257 0. 223 0. 199 0. 181 0. 167 0. 156 0. 147 0. 140 0. 134 0. 128 0. 124 0. 120 0. 117 0. 114 0. 112 0. 110 0. 102 0. 097 0. 091 0. 090 10 0. 576 0. 402 0. 315 0. 264 0. 230 0. 205 0. 187 0. 174 0. 163 0. 154 0. 147 0. 141 0. 136 0. 131 0. 128 0. 125 0. 122 0. 120 0. 117 0. 110 0. 106 0. 101 0. 100 11 0. 584 0. 409 0. 322 0. 271 0. 236 0. 212 0. 194 0. 181 0. 170 0. 161 0. 154 0. 148 0. 143 0. 139 0. 136 0. 132 0. 130 0. 128 0. 126 0. 119 0. 115 0. 111 0. 110 12 0. 592 0. 416 0. 329 0. 277 0. 243 0. 219 0. 201 0. 188 0. 177 0. 168 0. 161 0. 156 0. 151 0. 147 0. 143 0. 140 0. 138 0. 136 0. 134 0. 127 0. 124 0. 120

Question: How much can I afford to pay? Solve for: Present Value % INTEREST RATE How much can I afford to pay for brush control that will last 10 years, increase my grazing income by $3, 000/year, and I can get a loan for 6% interest? LIFE YEARS 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 25 30 50 100 3 0. 523 0. 354 0. 269 0. 218 0. 185 0. 161 0. 142 0. 128 0. 117 0. 108 0. 100 0. 094 0. 089 0. 084 0. 080 0. 076 0. 073 0. 070 0. 067 0. 051 0. 039 0. 032 4 0. 530 0. 360 0. 275 0. 225 0. 191 0. 167 0. 149 0. 134 0. 123 0. 114 0. 107 0. 100 0. 095 0. 090 0. 086 0. 082 0. 079 0. 076 0. 074 0. 064 0. 058 0. 047 0. 041 5 0. 538 0. 367 0. 282 0. 231 0. 197 0. 173 0. 155 0. 141 0. 130 0. 120 0. 113 0. 106 0. 101 0. 096 0. 092 0. 089 0. 086 0. 083 0. 080 0. 071 0. 065 0. 050 6 0. 545 0. 374 0. 289 0. 237 0. 203 0. 179 0. 161 0. 147 0. 136 0. 127 0. 119 0. 113 0. 108 0. 103 0. 099 0. 095 0. 092 0. 090 0. 087 0. 078 0. 073 0. 060 7 0. 553 0. 381 0. 295 0. 244 0. 210 0. 186 0. 167 0. 153 0. 142 0. 133 0. 126 0. 120 0. 114 0. 110 0. 106 0. 102 0. 099 0. 097 0. 094 0. 086 0. 081 0. 072 0. 070 8 0. 561 0. 388 0. 302 0. 250 0. 216 0. 192 0. 174 0. 160 0. 149 0. 140 0. 133 0. 127 0. 121 0. 117 0. 113 0. 110 0. 107 0. 104 0. 102 0. 094 0. 089 0. 082 0. 080 Payment = Present Value x (Years, %) Present Value = Payment / (Years, %) $22, 058 = $3, 000 /. 136 (to breakeven on improvement) 9 0. 568 0. 395 0. 309 0. 257 0. 223 0. 199 0. 181 0. 167 0. 156 0. 147 0. 140 0. 134 0. 128 0. 124 0. 120 0. 117 0. 114 0. 112 0. 110 0. 102 0. 097 0. 091 0. 090 10 0. 576 0. 402 0. 315 0. 264 0. 230 0. 205 0. 187 0. 174 0. 163 0. 154 0. 147 0. 141 0. 136 0. 131 0. 128 0. 125 0. 122 0. 120 0. 117 0. 110 0. 106 0. 101 0. 100 11 0. 584 0. 409 0. 322 0. 271 0. 236 0. 212 0. 194 0. 181 0. 170 0. 161 0. 154 0. 148 0. 143 0. 139 0. 136 0. 132 0. 130 0. 128 0. 126 0. 119 0. 115 0. 111 0. 110 12 0. 592 0. 416 0. 329 0. 277 0. 243 0. 219 0. 201 0. 188 0. 177 0. 168 0. 161 0. 156 0. 151 0. 147 0. 143 0. 140 0. 138 0. 136 0. 134 0. 127 0. 124 0. 120

Question: How many years to break-even? How many years will it take to break-even on an irrigation system that costs $20, 000, increases crop income $2, 000/year, and I can get a loan for 6% interest? Solve for: Years % INTEREST RATE LIFE YEARS 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 25 30 50 100 3 0. 523 0. 354 0. 269 0. 218 0. 185 0. 161 0. 142 0. 128 0. 117 0. 108 0. 100 0. 094 0. 089 0. 084 0. 080 0. 076 0. 073 0. 070 0. 067 0. 051 0. 039 0. 032 4 0. 530 0. 360 0. 275 0. 225 0. 191 0. 167 0. 149 0. 134 0. 123 0. 114 0. 107 0. 100 0. 095 0. 090 0. 086 0. 082 0. 079 0. 076 0. 074 0. 064 0. 058 0. 047 0. 041 5 0. 538 0. 367 0. 282 0. 231 0. 197 0. 173 0. 155 0. 141 0. 130 0. 120 0. 113 0. 106 0. 101 0. 096 0. 092 0. 089 0. 086 0. 083 0. 080 0. 071 0. 065 0. 050 6 0. 545 0. 374 0. 289 0. 237 0. 203 0. 179 0. 161 0. 147 0. 136 0. 127 0. 119 0. 113 0. 108 0. 103 0. 099 0. 095 0. 092 0. 090 0. 087 0. 078 0. 073 0. 060 7 0. 553 0. 381 0. 295 0. 244 0. 210 0. 186 0. 167 0. 153 0. 142 0. 133 0. 126 0. 120 0. 114 0. 110 0. 106 0. 102 0. 099 0. 097 0. 094 0. 086 0. 081 0. 072 0. 070 8 0. 561 0. 388 0. 302 0. 250 0. 216 0. 192 0. 174 0. 160 0. 149 0. 140 0. 133 0. 127 0. 121 0. 117 0. 113 0. 110 0. 107 0. 104 0. 102 0. 094 0. 089 0. 082 0. 080 9 0. 568 0. 395 0. 309 0. 257 0. 223 0. 199 0. 181 0. 167 0. 156 0. 147 0. 140 0. 134 0. 128 0. 124 0. 120 0. 117 0. 114 0. 112 0. 110 0. 102 0. 097 0. 091 0. 090 10 0. 576 0. 402 0. 315 0. 264 0. 230 0. 205 0. 187 0. 174 0. 163 0. 154 0. 147 0. 141 0. 136 0. 131 0. 128 0. 125 0. 122 0. 120 0. 117 0. 110 0. 106 0. 101 0. 100 11 0. 584 0. 409 0. 322 0. 271 0. 236 0. 212 0. 194 0. 181 0. 170 0. 161 0. 154 0. 148 0. 143 0. 139 0. 136 0. 132 0. 130 0. 128 0. 126 0. 119 0. 115 0. 111 0. 110 12 0. 592 0. 416 0. 329 0. 277 0. 243 0. 219 0. 201 0. 188 0. 177 0. 168 0. 161 0. 156 0. 151 0. 147 0. 143 0. 140 0. 138 0. 136 0. 134 0. 127 0. 124 0. 120

Question: How many years to break-even? How many years will it take to break-even on an irrigation system that costs $20, 000, increases crop income $2, 000/year, and I can get a loan for 6% interest? Solve for: Years % INTEREST RATE LIFE YEARS 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 25 30 50 100 3 0. 523 0. 354 0. 269 0. 218 0. 185 0. 161 0. 142 0. 128 0. 117 0. 108 0. 100 0. 094 0. 089 0. 084 0. 080 0. 076 0. 073 0. 070 0. 067 0. 051 0. 039 0. 032 4 0. 530 0. 360 0. 275 0. 225 0. 191 0. 167 0. 149 0. 134 0. 123 0. 114 0. 107 0. 100 0. 095 0. 090 0. 086 0. 082 0. 079 0. 076 0. 074 0. 064 0. 058 0. 047 0. 041 5 0. 538 0. 367 0. 282 0. 231 0. 197 0. 173 0. 155 0. 141 0. 130 0. 120 0. 113 0. 106 0. 101 0. 096 0. 092 0. 089 0. 086 0. 083 0. 080 0. 071 0. 065 0. 050 6 0. 545 0. 374 0. 289 0. 237 0. 203 0. 179 0. 161 0. 147 0. 136 0. 127 0. 119 0. 113 0. 108 0. 103 0. 099 0. 095 0. 092 0. 090 0. 087 0. 078 0. 073 0. 060 7 0. 553 0. 381 0. 295 0. 244 0. 210 0. 186 0. 167 0. 153 0. 142 0. 133 0. 126 0. 120 0. 114 0. 110 0. 106 0. 102 0. 099 0. 097 0. 094 0. 086 0. 081 0. 072 0. 070 Payment = Present Value x (Years, %) = Payment / Present Value 15 Years = $2, 000/Yr / $20, 000 =. 100 (6% column) 8 0. 561 0. 388 0. 302 0. 250 0. 216 0. 192 0. 174 0. 160 0. 149 0. 140 0. 133 0. 127 0. 121 0. 117 0. 113 0. 110 0. 107 0. 104 0. 102 0. 094 0. 089 0. 082 0. 080 9 0. 568 0. 395 0. 309 0. 257 0. 223 0. 199 0. 181 0. 167 0. 156 0. 147 0. 140 0. 134 0. 128 0. 124 0. 120 0. 117 0. 114 0. 112 0. 110 0. 102 0. 097 0. 091 0. 090 10 0. 576 0. 402 0. 315 0. 264 0. 230 0. 205 0. 187 0. 174 0. 163 0. 154 0. 147 0. 141 0. 136 0. 131 0. 128 0. 125 0. 122 0. 120 0. 117 0. 110 0. 106 0. 101 0. 100 11 0. 584 0. 409 0. 322 0. 271 0. 236 0. 212 0. 194 0. 181 0. 170 0. 161 0. 154 0. 148 0. 143 0. 139 0. 136 0. 132 0. 130 0. 128 0. 126 0. 119 0. 115 0. 111 0. 110 12 0. 592 0. 416 0. 329 0. 277 0. 243 0. 219 0. 201 0. 188 0. 177 0. 168 0. 161 0. 156 0. 151 0. 147 0. 143 0. 140 0. 138 0. 136 0. 134 0. 127 0. 124 0. 120

Question: Return on the investment? What is my return on investment for a $5, 000 livestock water facility, lasting 10 years, that increases grazing income $750/year? Solve for: Interest Rate % INTEREST RATE LIFE YEARS 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 25 30 50 100 3 0. 523 0. 354 0. 269 0. 218 0. 185 0. 161 0. 142 0. 128 0. 117 0. 108 0. 100 0. 094 0. 089 0. 084 0. 080 0. 076 0. 073 0. 070 0. 067 0. 051 0. 039 0. 032 4 0. 530 0. 360 0. 275 0. 225 0. 191 0. 167 0. 149 0. 134 0. 123 0. 114 0. 107 0. 100 0. 095 0. 090 0. 086 0. 082 0. 079 0. 076 0. 074 0. 064 0. 058 0. 047 0. 041 5 0. 538 0. 367 0. 282 0. 231 0. 197 0. 173 0. 155 0. 141 0. 130 0. 120 0. 113 0. 106 0. 101 0. 096 0. 092 0. 089 0. 086 0. 083 0. 080 0. 071 0. 065 0. 050 6 0. 545 0. 374 0. 289 0. 237 0. 203 0. 179 0. 161 0. 147 0. 136 0. 127 0. 119 0. 113 0. 108 0. 103 0. 099 0. 095 0. 092 0. 090 0. 087 0. 078 0. 073 0. 060 7 0. 553 0. 381 0. 295 0. 244 0. 210 0. 186 0. 167 0. 153 0. 142 0. 133 0. 126 0. 120 0. 114 0. 110 0. 106 0. 102 0. 099 0. 097 0. 094 0. 086 0. 081 0. 072 0. 070 8 0. 561 0. 388 0. 302 0. 250 0. 216 0. 192 0. 174 0. 160 0. 149 0. 140 0. 133 0. 127 0. 121 0. 117 0. 113 0. 110 0. 107 0. 104 0. 102 0. 094 0. 089 0. 082 0. 080 9 0. 568 0. 395 0. 309 0. 257 0. 223 0. 199 0. 181 0. 167 0. 156 0. 147 0. 140 0. 134 0. 128 0. 124 0. 120 0. 117 0. 114 0. 112 0. 110 0. 102 0. 097 0. 091 0. 090 10 0. 576 0. 402 0. 315 0. 264 0. 230 0. 205 0. 187 0. 174 0. 163 0. 154 0. 147 0. 141 0. 136 0. 131 0. 128 0. 125 0. 122 0. 120 0. 117 0. 110 0. 106 0. 101 0. 100 11 0. 584 0. 409 0. 322 0. 271 0. 236 0. 212 0. 194 0. 181 0. 170 0. 161 0. 154 0. 148 0. 143 0. 139 0. 136 0. 132 0. 130 0. 128 0. 126 0. 119 0. 115 0. 111 0. 110 12 0. 592 0. 416 0. 329 0. 277 0. 243 0. 219 0. 201 0. 188 0. 177 0. 168 0. 161 0. 156 0. 151 0. 147 0. 143 0. 140 0. 138 0. 136 0. 134 0. 127 0. 124 0. 120

Question: Return on the investment? What is my return on investment for a $5, 000 livestock water facility, lasting 10 years, that increases grazing income $750/year? Solve for: Interest Rate % INTEREST RATE LIFE YEARS 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 25 30 50 100 3 0. 523 0. 354 0. 269 0. 218 0. 185 0. 161 0. 142 0. 128 0. 117 0. 108 0. 100 0. 094 0. 089 0. 084 0. 080 0. 076 0. 073 0. 070 0. 067 0. 051 0. 039 0. 032 Payment = Present Value x (Years, %) = Payment / Present Value 8% = $750/Yr / $5, 000 =. 150 (10 Yr row) 4 0. 530 0. 360 0. 275 0. 225 0. 191 0. 167 0. 149 0. 134 0. 123 0. 114 0. 107 0. 100 0. 095 0. 090 0. 086 0. 082 0. 079 0. 076 0. 074 0. 064 0. 058 0. 047 0. 041 5 0. 538 0. 367 0. 282 0. 231 0. 197 0. 173 0. 155 0. 141 0. 130 0. 120 0. 113 0. 106 0. 101 0. 096 0. 092 0. 089 0. 086 0. 083 0. 080 0. 071 0. 065 0. 050 6 0. 545 0. 374 0. 289 0. 237 0. 203 0. 179 0. 161 0. 147 0. 136 0. 127 0. 119 0. 113 0. 108 0. 103 0. 099 0. 095 0. 092 0. 090 0. 087 0. 078 0. 073 0. 060 7 0. 553 0. 381 0. 295 0. 244 0. 210 0. 186 0. 167 0. 153 0. 142 0. 133 0. 126 0. 120 0. 114 0. 110 0. 106 0. 102 0. 099 0. 097 0. 094 0. 086 0. 081 0. 072 0. 070 8 0. 561 0. 388 0. 302 0. 250 0. 216 0. 192 0. 174 0. 160 0. 149 0. 140 0. 133 0. 127 0. 121 0. 117 0. 113 0. 110 0. 107 0. 104 0. 102 0. 094 0. 089 0. 082 0. 080 9 0. 568 0. 395 0. 309 0. 257 0. 223 0. 199 0. 181 0. 167 0. 156 0. 147 0. 140 0. 134 0. 128 0. 124 0. 120 0. 117 0. 114 0. 112 0. 110 0. 102 0. 097 0. 091 0. 090 10 0. 576 0. 402 0. 315 0. 264 0. 230 0. 205 0. 187 0. 174 0. 163 0. 154 0. 147 0. 141 0. 136 0. 131 0. 128 0. 125 0. 122 0. 120 0. 117 0. 110 0. 106 0. 101 0. 100 11 0. 584 0. 409 0. 322 0. 271 0. 236 0. 212 0. 194 0. 181 0. 170 0. 161 0. 154 0. 148 0. 143 0. 139 0. 136 0. 132 0. 130 0. 128 0. 126 0. 119 0. 115 0. 111 0. 110 12 0. 592 0. 416 0. 329 0. 277 0. 243 0. 219 0. 201 0. 188 0. 177 0. 168 0. 161 0. 156 0. 151 0. 147 0. 143 0. 140 0. 138 0. 136 0. 134 0. 127 0. 124 0. 120

Financial Analysis vs. Economic Analysis Economic analysis: n Is it Profitable? n Compare benefits & costs over the project's life

Financial Analysis vs. Economic Analysis Economic analysis: n Is it Profitable? n Compare benefits & costs over the project's life Financial analysis: n Is it Affordable? n Compare benefits & costs over the loan period

Economic Analysis: Total Cost: $5, 000 Annual Cost: $648/Yr (10 Yr, 5%) Annual Benefit: $750/Yr Net Benefit: $102/Yr

Economic Analysis: Total Cost: $5, 000 Annual Cost: $648/Yr (10 Yr, 5%) Annual Benefit: $750/Yr Net Benefit: $102/Yr Financial Analysis: Total Cost: $5, 000 Annual Cost: $1, 155/Yr (5 Yr, 5%) Annual Benefit: $750/Yr Net Benefit: -$405/Yr (Yrs: 1 -5) $750/Yr (Yrs: 6 -10)

For more information search for: • • Amortization Table NRCS Economic Tools Website NRCS Economic Handbook Contact you NRCS State or NTSC Economist Thanks… Hal Gordon WNTSC Economist Portland, Oregon

The End

Class Exercise

Class Exercise: “T” Chart Wheat Residue Management Columbia Plateau, Oregon No-Till Drill/2, 000 Acres $15, 000 Discount Rate 7% Time Period 10 Years Increased Herbicide Use $25/Acre Crop Yield Increase 8 Bushels/Acre Crop Value $4/Bushel Crop Quality Improvement Pheasant/Quail Habitat Improvement Reduced Erosion (2 Tons) Water Quality Improvement

Class Exercise: “T” Chart CONSERVATION TREATMENT EFFECTS INFORMATION NAME – H. Gordon LOCATION – Aloha, Oregon SETTING – Wheat, Columbia Plateau, Oregon CONSERVATION TREATMENT: Residue Management, Direct Seeding POSITIVE EFFECTS (Benefits) Crop Yield Increase 8 Bushels/Year X $4/Bu = $32/Year Crop Quality Improvement Pheasant/Quail Habitat Improvement DATE – July 4, 2004 RESOURCE PROBLEMS: Productivity, Erosion, Water Quality NEGATIVE EFFECTS (Costs) No-Till Drill $15, 000/2, 000 Acres = $7. 50/Acre Annual Cost (7%, 10 Years) $7. 50 X. 142 = $1. 07/Acre/Year Increased Herbicide Cost = $25. 00/Acre/Year Reduced Erosion = 2 Tons Increased Risk of New System Water Quality Improvement Total Benefits = $32/Acre/Year Total Costs = $26. 07/Acre/Year