Flashcards in Animal Health Economics Deck (37):
What are the important things that can change on a farm?
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?
What four basic items is partial budget analysis interested in?
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?
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