Abstract
Reduction of labour is one of the major concerns in the recent past in the agriculture sector of Sri Lanka recent past. Agriculture has become less attractive to youth. Even though mechanization will be one of the better solution to overcome this problem, high cost of capital requirement restricts small land owners to move into mechanization. The Department of Agriculture (DOA) has identified this issue and proposed to establish machinery hiring-out centres to enable the farmers to obtain services at a reasonable rate. This study aimed at estimating the financial feasibility and economic feasibility of hiring-out centres over the project economic life of 10 years. Financial feasibility analysis included financial statement analysis, net project worth assessment and sensitivity analysis. For the purpose of economic analysis, financial prices were converted to shadow prices using the shadow exchange rates and project worth was recalculated. In project analysis, it is common to have multiple IRR rates, which was answered with MIRR estimation representing the actual IRR. Results of the study revealed that the project is financially viable and generates positive net income of Rs. 27 million annually throughout the period, generation of net cash inflow of Rs. 257.7 million, and accumulation of net assets of Rs. 277.7 million. Project worth analysis resulted in a positive financial NPV of Rs. 7.6 million, IRR of 19%, MIRR of 13% and a B/C ratio of 1.03. However, the IRR value and B/C ratio is contradictory to each other due to multiple IRR values and limited time frame of analysis of 10 years and this was addressed through MIRR measure, which is the optimal IRR value of the project and is consistent with the B/C ratio. Economic feasibility analysis showed a positive ENPV of Rs. 10.1 million, EIRR of 28%, EMIRR of 18% and a B/C ratio of 1.05. The study concluded that establishment of a machinery hiring-out centre is feasible at financial and economic conditions in a minimal risk environment. Consequently, government may have a role in facilitating the project implementation with suitable subsidy scheme till the project maturity. Development of a suitable implementation design would be the next step such as a PPP model.
Highlights
Reduction of the labour force in agriculture has solution to overcome this issue through programs become a major concern in the Sri Lankan such as ‘Yaya 2’ programme where mechanization agriculture sector
The Net Present Value (NPV) of the project is positive and the calculated internal rate of return (IRR) was higher than the cost of capital revealing the profitability of the project
A greater NPV and IRR in the financing option compared to the self-financing option suggest that a mixed financing option would be most suited
Summary
Reduction of the labour force in agriculture has solution to overcome this issue through programs become a major concern in the Sri Lankan such as ‘Yaya 2’ programme where mechanization agriculture sector. Mechanization could be a specific crop operations (e.g. land preparation, harvesting and processing in paddy) and machine usage has increased from 20% to 55% over the period of 1980 to 2013 (Abeyratne, 2017). Tractors are the most common among Sri Lankan farmers and Sri Lanka custom data shows that tractor availability has increased during the period 1991 to 2001 at a rate of 3.4% (Agriculture tractors: FAO web). From 2015 to 2017, other agriculture machinery imports have increased, namely, seeders and transplanters from 120 to 2,574, combined harvesters and threshers from 1,079 to 23,192 and root and tuber harvesting machines from 4 to 4,406 (Sri Lanka Customs – unpublished reports)
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