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Flashcards in Animal Health Economics Deck (37):

What are the important things that can change on a farm?

Feed prices
Labour prices
Technology - housing, breeds, feeding systems, harvesting systems
Animal health status


What is partial budgeting? What is it useful for?

Based on additional costs and additional benefits
A practical tool for the application of marginal costs and benefits


How do you perform partial budget analysis graphically?

(insert picture)


What four basic items is partial budget analysis interested in?

New costs
Revenue forgone
Costs saved
New revenue


What are new costs?

Those that directly relate to the implementation of an intervention or project


What is revenue forgone?

Income that is sacrificed by making a change and relates to the opportunity cost of the change


What are costs saved?

Related to expenditure caused by the presence of a disease that will cease to exist if the disease is eradicated or be reduced if the disease is controlled
May have been paid by the farmer or by the government


What is new revenue?

Extra income generated by an animal health intervention that changes the animal health status


What is the limitation of gross margin analysis and partial budget analysis?

Can only be carried out for short periods of time usually a year


What also needs to be factored in if costs and benefits occur over a number of years?

When the costs occur
When the benefits occur


What is discounting?

The process by which you compare costs and benefits that occur in different years by converting them into a present value


What is a discount rate?

Percentage used to perform discounting
Not necessarily the same as the interest rate offered at banks


What is cost benefit analysis?

Method used to compare costs and benefits that occur at different times


Which three basic decision making criteria are used in cost benefit analysis?

Net Present Value (NPV)
Internal Rate of Return (IRR)
Benefit Cost Ratio (BCR)


What is the net present value (NPV)?

Difference between the sum of the present value of the benefits and the sum of the present value of costs


What should the NPV be to make the investment worthwhile?

A positive number


What is the internal rate of return?

Calculation of the investments rate of return by determining the discount rate which will make the net present value equal to zero
The interest rate that will make the investment break even


What IRR value makes the project acceptable?

If it is greater than the minimum acceptable rate or the opportunity cost of money


What will the IRR be for a private company borrowing money?

The banks interest rate


What needs to be carefully considered in IRR calculation?

If costs are never greater than benefits then investment won't have an IRR
If a very high IRR is produced then treat the analysis with doubt


What is the benefit cost ratio?

Calculated by dividing the sum of the present value of benefits by the sum of the present value of costs


What is BCR an indicator of? What is an acceptable level?

Productivity of the money spent
Greater than 1 is an acceptable investment


Why do NPV, IRR and BCR need to be incorporated?

Each indicator has different strengths and weaknesses and together produce a strong analysis


What else should be carried out before a farmer makes an investment?

Financial appraisal which examines the practicalities of the investment


What is the purpose of financial feasibility analysis?

Determine whether or not the investment project will generate sufficient cash income to make the principle and interest payments on the borrowed funds used to purchase the asset


What are the steps for financial feasibility analysis?

Determine the annual net cash flows
Determine the annual principal and interest payments
Compare the annual cash flow with the annual principal and interest repayments


What does an investment need to meet the load repayments?

To produce a cash surplus


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 due to environmental factors


What is done in sensitivity analysis?

A range of figures is provided for uncertain parameters and the worst and best scenarios for the project or activity are used to perform separate gross margin analyses, partial budgets or cost-benefit analyses


What can the output of sensitivity analysis be used for?

Determining how sensitive a project or the activity is to changes in the costs and benefits that cannot be given definite values
Estimates the risk of the activity and can help indicate which prices or production levels have the greatest impact on project or activity profitability


What is break-even analysis?

Form of sensitivity analysis where the search is for a value of a parameter which will produce a zero return profit or net present value


What is decision analysis?

A method for formally analysing complicated decisions that involve a sequential series of actions and events


What three aspects need to be identified for decision analysis?

The events which a decision maker can control
The probability of the occurrence of chance events
The value of various outcomes normally expressed in money terms


Which two methods can be used to quantify decision analysis?

Pay-off tables
Decision trees


What is a pay-off table?

Columns representing the treatments/decisions to be made with sub columns of programme-outcome combination, probability of programme-outcome combination and expected value of programme-outcome combination
Rows representing outcome, disease, no disease and expected value


What is an advantage of decision trees?

Explicitly depict the chronology of events and can be used to evaluate a sequence of decisions


How are decision trees constructed?

From left to right, starting with the earliest decision to be made
Square boxes = decision points, branches = complete set of mutually exclusive options being considered
Circles = chance events, branches = complete set of mutually exclusive chance events that might happen at that point
All branches must be labelled
Net benefit of each path through tree is identified at terminal branch