4.2.5.3 Investment possibilities

Assumptions of investment feasibility

Praneetvatakul et al. (1999) carried out a financial investment analysis for neem processing on a larger scale based on the following assumptions:

· A new company would be set up with investment costs of 5.2 million baht.

· Investment items include land purchase, land preparation, water and energy supply installations, machinery; operating costs are based on the key data taken from the Thai Neem Products Company Ltd.

· Raw materials are assumed to be available within the country. Neem seeds are the main raw material used to produce neem extract. Nonetheless, neem fruits are also used to produce neem fruit powder.

· Production capacity is set at 60 litres of neem extract and 330 operating days per year. The growth rate of production is assumed to be constant for the next 15 years. A period of fifteen years was used for investment analysis since most machinery is no longer used after 15 years.

· An eight per cent discount rate was used for the calculation of net present value.

· Short-term credit is assumed to cover variable costs each year with an interest rate of 10%. Long-term credit is also assumed to have a 10% interest rate.

Table 37: Estimated yearly production of a small-scale neem industry

A cost-benefit analysis is given below.

Results of financial investment analysis

Based on the financial investment analysis of the base case model, investing in a small-scale neem industry is quite profitable.

Four criteria are used to investigate the investment feasibility.

· Net Present Value (NPV)

The net present value is the annual sum of net return over a defined period of years. It is the present value of benefits minus the present value of costs.

The investment analysis for this small-scale neem business reveals a net present value of 15 years of 35.7 million baht. The present value of net benefits (benefits minus costs) over the next 15 years is a value greater than zero, indicating that it is feasible to invest in the project.

· Benefit-Cost Ratio (BCR)

The benefit-cost ratio is the ratio of the present value of benefits to the present value of costs. It is a criterion of relative net gain.

The investment analysis reveals a benefit-cost ratio of 1.88, which indicates that the value of benefit over cost is greater than 1 and hence it is profitable to invest in the project.

· Internal Rate of Return (IRR)

The internal rate of return is the discount rate needed for the present value of benefits to equal the present value of costs, or it is the rate at which the net present value will equal zero.

The investment analysis shows that the internal rate of return equals 76%. Based on economic theory, all alternatives with an internal rate of return exceeding the discount rate are profitable and desirable. For instance, this implies that the money invested in the small-scale neem business is more profitable than if it were deposited at the bank where the present interest rate in Thailand is only 6%.

· Payback period

If the investment in a project is paid back within a specified time, usually in the order of 3-4 years, the project is accepted.

Here the payback period equals two years, which implies that the investment costs are already covered only two years after the business goes into operation. This shows a very quick return on investment and hence the neem business is quite acceptable for investment.

To summarise, with initial investment costs of about 6 million baht it is quite attractive to invest in the neem business. It provides high benefits, a high rate of return and quick investment turnover.

1. Sensitivity analysis

Sensitivity analysis aims at testing the unpredictable events that might occur, for instance, what would happen if the benefit of a small-scale neem industry were not as high as expected in the base model, or if the costs were higher than expected in the base model.

The results of sensitivity analysis show that if there were a reduction in benefits by 20% and/or an increase in the costs by 20%, investment in a neem business would still be profitable.

Table 38: Results of investment analysis for a small-scale neem industry

2. Break-even analysis

Although there are several products produced by the neem business, neem extract is the principal product of this company. Therefore the break-even analysis will be investigated based on the revenue generated from neem extract. Based on the data of financial investment analysis, total costs (as used for the analysis) come to 5,032,450 baht per year. The sale price of neem extract is 450 baht per litre. Total production of neem extract is 20,000 litre per year.

Break-even yield. Based on the calculation, the minimum production required to cover the variable costs, so that the company can survive and continue the business, is about 11,183 litre per year of neem extract. If we assume 300 working days a year, at least 47 litres per day of neem extract are needed to reach a profitable level.

Break-even point of operating days. With the current production capacity of 60 litres per day, at least 186 days of production per year are required to generate enough revenue to cover the costs.

Break-even price. The minimum price that will cover the costs is about 252 baht per litre. This suggests that increasing production or reducing the costs of the raw material, which is main item of total costs, would allow the price of the product to be set lower.

Table 39: Results of a break-even analysis