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Grape IPM in the Northeast

Net Present Value Analysis of Weather Equipment

Using weather equipment and disease models will improve the timing of sprays over that of a calendar-based spray program. How feasible is the purchase of weather equipment for the average grower?

The total cost (in 1995) of an EBDC/SI spray, including labor and equipment, is $31.19 per acre. For purposes of this discussion, $2,000 is the cost of the weather equipment, and the following assumptions are made:

  1. 10-year useful life of weather equipment, with minimal upkeep
  2. discount rate (interest rate) of 10 percent
  3. every third season, the use of weather-driven disease models will result in elimination of one fungicide application
  4. 50-acre vineyard
  5. any savings due to improved disease control is disregarded

Dividing the $2000 initial cost of weather equipment by the cost of the saved EBDC/SI spray gives the number of acres needed for payback: $2,000 ÷ $31.19 = 64 acres to payback. A grower would need to save a spray on 64 acres to break even on the weather equipment purchase.

A better way to analyze capital purchases is to discount future cash flow or savings. One discounted cash flow method is "net present value" (NPV). Investors should invest only when there is a positive NPV. This value can also serve as an indicator of the maximum one should pay for an asset. The NPV method of analysis will even out the expected savings for weather equipment:

50 acres X $31.19 = $1559.50/3 (once every 3 years) = $520 yearly savings

Using a "present value of an annuity" table, we can calculate the discount factor for a 10-year cash stream discounted at 10 percent, which is 6.1446. This number is then multiplied by the yearly cost savings of $520.

$520 (yearly savings) X 6.1446 (discount factor) = $3,195 - $2,000 (initial cost of equipment) = $1,195 net present value

The positive NPV of $1,195 indicates that an investment in weather equipment is advisable. If more than one fungicide application were saved every three years, the weather equipment would be an even better deal than that shown here. Since the discounted savings equal $3,195 in the above example, a 50-acre grower would not be wise to spend more than that amount for weather equipment.

What is the minimum number of vineyard acres needed for weather equipment to pay for itself? Using the previous example, we can work backwards to find the minimum size. We need a discounted income stream (over 10 years) to equal the cost of the equipment. Again assuming an initial weather equipment cost of $2,000, the calculations are:

$2,000 (present value) ÷ 6.1446 (discount factor) = $325.48 yearly savings

$325.48 X 3 (years) = $976.46

$976.46 ÷ $31.19 (spray cost) = 31.3 acres

Each grower with an acreage at least this large should save by investing in weather equipment. Growers are encouraged to calculate the potential savings on their own farms, using acreage, spray costs, and equipment costs.