Book contents
- Frontmatter
- Contents
- Preface
- Acknowledgements
- 1 Introduction
- 2 Farm management
- 3 Farm analysis and planning
- 4 Principles of production
- 5 Costs and returns
- 6 Farm profits, financial statements and records
- 7 Cash flows
- 8 Gross margins
- 9 Time is money
- 10 Planning changes
- 11 Cropping
- 12 Animals
- 13 Mechanisation
- 14 Farm development
- 15 Farm credit and finance
- 16 Beyond the farm
- Appendix 1 Interest rate tables
- Appendix 2 Metric conversion
- Glossary
- Index
9 - Time is money
Published online by Cambridge University Press: 12 October 2018
- Frontmatter
- Contents
- Preface
- Acknowledgements
- 1 Introduction
- 2 Farm management
- 3 Farm analysis and planning
- 4 Principles of production
- 5 Costs and returns
- 6 Farm profits, financial statements and records
- 7 Cash flows
- 8 Gross margins
- 9 Time is money
- 10 Planning changes
- 11 Cropping
- 12 Animals
- 13 Mechanisation
- 14 Farm development
- 15 Farm credit and finance
- 16 Beyond the farm
- Appendix 1 Interest rate tables
- Appendix 2 Metric conversion
- Glossary
- Index
Summary
Introduction
Managing time and its effects is another important task for the farmer. First, there is a cost, in terms of income forgone, if he fails to complete certain operations on time, e.g. sowing, harvesting and disease control. Second, a dollar received today is usually valued more highly than a dollar received in, say, 6 years’ time. The reason is that today's dollar usually can be used productively, and it will grow to more than a dollar in 6 years’ time, just by putting that dollar in the bank and leaving it there. Here, we will deal with the second meaning.
There is the further issue of inflation. Inflation also makes the dollar in the pocket worth considerably more than the expected dollar of next and later years; we will handle this point in some detail later. * But even if there were no inflation, it would be better to have a dollar today than one in 6 years’ time. The reason: you can invest today's dollar, and if you reinvest it (and the, say, 5% interest it earns each year) it will grow to $1.34 in 6 years’ time.
The correct answer to the problem of whether to use land, labour, and capital in one way which might bring in a large net cash flow, but not for a number of years, or in another way which may offer the prospect of a smaller net cash flow but sooner, involves putting a value on money received and spent at different times in the future. The decision on the best policy is made easier by using the technique of discounting the cash flows to their net present values (NPVs). This allows valid comparisons to be made between alternative investments which have differing flow patterns of costs and returns in future years. So, the two relevant points, when thinking about the role of discounting in farm management decision-making, are:
the number of years in the future; and comparing alternatives.
Let us take the situation where a farmer, (or any investor), after looking at a few development options, has already decided, for various reasons, that one particular programme is best for him. It will be a 'number of years in the future’ before the programme reaches its full potential (reaches a ‘steady state’).
- Type
- Chapter
- Information
- The Economics of Tropical Farm Management , pp. 67 - 77Publisher: Cambridge University PressPrint publication year: 1985