APIP Agricultural Policy Implementation Project

4.2 Cash Flow Analysis
Exhibit 4.3 shows cash-flow analyses 31 for all three types of flowers
under low-medium-high yield scenarios and average price assumptions. Estimates
of capital investment costs and operating expenditures are estimated based on the
figures presented in the enterprise budgets. Cash inflows are the projected
revenues (using constant prices) over a 15-year period assuming that 80 percentof
production is actually sold. Cash outflows include the initial investment of
201,100 DT, plus replacement costs in later years. The incremental net benefit
represents the working capital before financing is considered. The estimates of
loan receipts and financing requirements show how much the grower is expected to
borrow (100,000 DT in this case), and what the repayment schedule (debt service)
is expected to be given an interest rate of 9.5 percent. It is assumed here that
the grower will provide about one-half of the initial investment costs (100,000
DT) and finance future capital investments with working capital generated, as
represented by the incremental net benefit after financing.
Even under low yield scenarios, positve cash flows are registered for
roses and qladiola but not for carnations which show a negative internal rate of
return of 23.8 percent. Positive rates of return are shown for all flowers under
the medium and high yield scenarios. The highest internal rate of return is for
roses, 196.9 percent under the high yield scenario, while gladiola show a 96.1
percent with high yields. Overall, therefore, the return on capital investment
in flower production appears to be high under these simplified models. However,
much caution should be exercised in drawing conclusions from these. First, while
exporting cut flowers appears to be a very profitable enterprise, there are
substantial short-term capital requirements. More importantly, as emphasized
earlier in this report, flowers must be carefully packed and shipped, and need
to arrive at the wholesalers in excellent condition. This requires a considerable
degree of experience, expertise, and reliance on a well-functioning
infrastructure. Timing is critical and shipping delays can result in disastrous
losses to growers. Finally, the analysis reflects a simplified model of existing
production systems, and more farm survey work should be done, especially of
agronomic practices, to render a more rigorous investment analysis.
31 The format used draws mostly on J. Price Gittenger's Economic Analysis
of Agricultural Projects, Chapter 4.
33