Net Present Value Calculation 2 Last Updated: October 28, 2019, First Released: 2012 Author: Kevin Boyle, President, DevTreks Version: DevTreks 2.2.0 A. Capital Budget Net Present Value (NPV) Introduction The introductory Net Present Value 1 tutorial summarizes the main price adjustments, or discounting, used in NPV calculators. That reference explained the calculations associated with Operating Budgets. This reference explains the calculations for Capital Budgets (1*). Discounting is identical in both budgets, but Operating Budgets only use an Input’s operating and allocated overhead costs while Capital Budgets can contain capital costs as well (2*). Section Page Data URLs 2 Inputs 3 Components 7 Capital Budgets 12 Analyses 16 Summary 18 B. Data URLs This reference uses irrigation capital data taken from the Kansas State Cooperative Extension Irrigation Capital Requirements reference (Obrien et al, 2016). That reference documents the capital and energy costs for flood, center pivot, and subsurface drip, irrigation systems. This capital budget data is owned by the Core Sample Economics Datasets club and can be found at the following URLs. NPV Calculators: https://www.devtreks.org/agtreks/preview/crops/linkedviewgroup/Net Present Value Calculators Group/5/none/ https://localhost:5001/agtreks/preview/crops/linkedviewgroup/Net Present Value Calculators Group/5/none Inputs https://www.devtreks.org/agtreks/select/crops/inputgroup/Irrigation, Sample Investment Analyses/2126771763/none/ https://localhost:5001/agtreks/select/crops/inputgroup/Irrigation, Sample Investment Analyses/2126771761/none Components https://www.devtreks.org/agtreks/select/cropsconservation/componentgroup/Irrigation Examples/551/none/ https://localhost:5001/agtreks/preview/cropsconservation/componentgroup/Irrigation, Examples/549/none Capital Budgets (Investments) https://www.devtreks.org/agtreks/preview/cropsconservation/investmentgroup/Capital Budgets, Irrigation Examples/275505672/none https://localhost:5001/agtreks/preview/cropsconservation/investmentgroup/Capital Budgets, Irrigation Examples/275505670/none Story (owned by the DevTreks Help club in the commons network) https://localhost:5001/commontreks/preview/commons/linkedviewpack/Capital Budget Tutorials/83/none Dictionary entry (owned by Core Sample Economics Datasets club): https://localhost:5001/agtreks/preview/crops/linkedviewpack/Capital Investments/21/none These examples do not use Outputs or Outcomes, only costs are calculated. DevTreks discourages cost-only analysis. Benefits are just as important as costs and should be included in all analyses, even if the benefits must use nonmonetary indicators, as demonstrated in the Resource Stock, Monitoring and Evaluation, Performance Analysis, and Social Performance Analysis, tutorials. C. Inputs a. Data Structure The following image demonstrates that 31 irrigation inputs are used to calculate input costs. b. Calculations The only input requiring custom, or domain-specific, calculations is the irrigation pump. The Capital Input tutorial explains how these calculations work. https://www.devtreks.org/agtreks/preview/crops/input/Power Unit, electric, 500 foot lift/2147377333/none https://localhost:5001/agtreks/preview/crops/input/Power Unit, electric, 500 foot lift/2147377345/none D. Components a. Data Structure The following image demonstrates that 4 irrigation Components are used to calculate capital costs. b. Calculations A Net Present Value Component Calculator was run for each Component and produced the cost data shown in the following image. These costs summed each Input’s Capital Cost in their calculation. Why does the Annual Column include a negative Allocated Overhead Cost when the Inputs show zero Allocated Overhead Costs? Because a rule enforced in the NPV calculations documented in the introductory reference is to take discounted Salvage Value out of Allocated Overhead Costs and not Operating Costs or Capital Costs. The Component’s negative Allocated Overhead Cost reflects discounted salvage value. Operating Budgets treat all annual amortized costs as Allocated Overhead only (as do the full Capital Budget costs shown next), and may be a better approach. At the time this rule was enforced, a requirement for NPV calculations in DevTreks was to match the Operating Budget calculations in the Handbook. This is an example of a calculation that a social network might not agree with. If not, the coordinator of a social network should contact their their social network’s technical support staff explaining the preferred calculations (i.e. same calculations in Operating and Capital Budgets). If the case is made, the next upgrade will include the recommendations. DevTreks’ social networks are never perfect. Version 2.1.0 linked 3 NPV Analyzers to this Component Group on localhost for testing purposes. The Benefit Cost Analysis tutorial explains how NPV Analyzers work. The following image demonstrates a resultant Change By Id analysis. Two analyzers had been already been linked to this group, but they used deprecated analyzers. They were deleted and then replaced. This type of data maintenance is an ongoing chore for any club. E. Capital Budgets a. Data Structure The following image demonstrates that 3 irrigation Capital Budgets are used to calculate investment costs. b. Calculations A Net Present Value Capital Budget Calculator was run for each investment and produced the cost data shown in the following image. DevTreks recommends that Capital Budgets also document the performance of investments by including Outcome and Output data. The positive Operating Costs and Allocated Overhead Costs in the cash flow column result from the way the irrigation power calculations are run (see the Inputs section). Note the difference in how Components are calculated now. All annual amortized costs are treated as Allocated Overhead, not Capital and Allocated Overhead Costs. The responsibility of social networks is to recommend improvements and to ask the technologists supporting DevTreks to implement those recommendations. F. Analyses The Benefit Cost Analysis 1 tutorial demonstrates how to aggregate and analyze net present value calculations. The following image shows that several analyses and a Story have been linked to this group of Capital Investments. As mentioned in several tutorials, base elements can be calculated and analyzed in thousands of ways. The Social Budgeting tutorial demonstrates how to develop a market for these services. In the long term, markets for data services can provide clubs with the incentives they need to build these tools. Version 2.1.0 tests required deleting the NPV Analyzers shown in this image and then linking 2 new ones. That usually means that deprecated, or old versioned, Analyzers had originally been used with this data. Data maintenance is an important ongoing responsibility for any serious club. The following image shows the results for the Machinery Analysis. Summary Capital investments are a basic requirement for modern society. They allow bridges to be built, factories to expand, sewers to remove wastes, climate change to be mitigated, and patients to be cured. This basic Capital Budgeting data may help people to improve their lives and livelihoods. Footnotes 1. References in DevTreks also use the term Investments for Capital Budgets. 2. The Life Cycle Calculator 1 reference demonstrates that Capital Budgets can include capital costs, allocated overhead costs, and operating costs. DevTreks leaves it up to networks to define the data standards and rules to be followed by clubs in their network. Those data standards should be documented in professional publications. The Handbook does not explicitly document calculations for Capital Investments, so other documentation, such as that found in the LCA tutorial, is needed. References O’Brien, Dumler, and Rogers. Irrigation Capital Requirements and Energy Costs. Farm Management Guide MF-836. Department of Agricultural Economics. Kansas State. 2011 References Note We try to use references that are open access or that do not charge fees. Improvements, Errors, and New Features Please notify DevTreks (devtrekkers@gmail.com) if you find errors or can recommend improvements. A video tutorial explaining this reference can be found at: https://www.devtreks.org/commontreks/preview/commons/resourcepack/NPV Calculation 2, Capital Budgets/445/none/ DevTreks –social budgeting that improves lives and livelihoods 19