Vincent de Leijster

64 Chapter 4 4.2.3.1 Long-term profitability metrics The cash flow model allows to calculate NPV, IRR and DPBT over the full lifetime of an almond plantation. These economic metrics are widely used to assess and compare management practices, including comparison between environmentally friendly practices with conventional management (Lalani et al., 2017; Sgroi et al., 2015; Stillitano et al., 2016; Torres et al., 2016). We assumed an almond plantation project horizon of 30 years, as it is reported that almond plantations’ life-time in this region exceeds 30 years (Sanz and Marco, 2018), and this time horizon is considered adequate long-term economic analysis for agricultural projects (Sgroi et al., 2015). The economic metrics NPV, IRR and DPBT were calculated using 1000 Monte Carlo iterations (Di Trapani et al., 2014). Net Present Value (NPV) takes all costs and benefits generated during the entire project lifetime into account and assumes that costs and revenues generated in the beginning of the project are valued more, therefore it uses a discount factor to correct for the time discrepancy. NPV is calculated as the cumulated yearly present value (FAO, 1991): (equation 1) where CF n represents the annual cash flow in period n (year 1-30) and is calculated as the revenues minus the operational costs for that given year, r is the discount rate, and IC the investment cost of the project. The baseline discount rate was set to 5%, which is realistic for Mediterranean tree-crop plantations (Sgroi et al., 2015; Torres et al., 2016), and advised by the European Commission (European Commission, 2014). Internal Rate of Return (IRR) is the discount rate at which discounted cash inflows equal discounted cash outflows, meaning the discount rate at which NPV equals zero. IRR is an indicator of investment decisions, as an IRR lower than or around the reference discount rate (in our case 5%) suggests that the investment is risking providing insufficient returns. Unlike NPV, IRR does not depend on a chosen discount rate, allowing for different outcomes. IRR was calculated as (Di Trapani et al., 2014; FAO, 1991): (equation 2) Discounted Payback Time (DPBT) is the point in time (n) when the discounted returns match the initial investments and at which the project becomes profitable, in other words the year wherein the cumulated present value equals zero. DPBT ignores cash flows that are produced afterwards and therefore excludes information of the overall project investment. DPBT was numerically solved as (FAO, 1991):