THE INVESTMENT ANALYSIS OF CEA HYDROPONIC SYSTEM GROWING BOSTON LETTUCE

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THE INVESTMENT ANALYSIS OF CEA HYDROPONIC SYSTEM
GROWING BOSTON LETTUCE
Analysis by GUNES ILASLAN, Ph.D.
Modified by Georgia Agricultural Education
Curriculum Office July, 2002
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Contents of The Presentation

• Selected Locations of CEA Hydroponic
• Operations
• Economic Model and Methodology
• Operating and Production Costs
• Sensitivity Analysis
• Conclusions

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Figure 1. Selected US Locations for CEA
Hydroponic Operations
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Figure 2. Economic Model and Methodology for
Capital Investment Analysis
Total Before Tax Revenue
Product Shrinkage
Price
Direct Variable Costs
Total Before Tax Cash Outflows
Indirect Variable Costs
Total After Tax Cash Inflows
Overhead Costs
Tax Savings from Depreciation
Labor Costs
After Tax Net Cash Flow
Initial Investment Costs
NPV Discount Factor
Asset Replacement Costs
Salvage Value of Investment
Net Present Value of Investment
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SALES REVENUES
Annual Production 344,925 heads/year Shrinkage
3 Grower Price Breakeven Price
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FINANCING of the INVESTMENT

• 50 Debt and 50Equity
• Cost of Equity 14
• Loan Interest Rate 8.5
• Discount Rate 8
• (The Weighted Average Cost
• of Capital After Taxes)

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Table 1. Total Capital Investment Costs
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COSTS of PRODUCTION

• Direct Variable Costs
• Seed, Fertilizer, Media, Oxygen,
  Plastic
• Package, and Shipping Container
• Indirect Variable Costs
• Electricity, Heating, WaterSewer,
  Freight
• Expenses, Telephone, Office Expenses,
  Labor
• Fixed Costs
• Insurance, Property Tax, Repairs and
• Maintenance, Miscellaneous

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DIRECT VARIABLE COSTS
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FIXED/OVERHEAD COSTS
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INDIRECT VARIABLE COSTS
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Table 2. The Product Price and Price Premiums for
CEA Hydroponic Lettuce
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SENSITIVITY ANALYSIS

• One-way sensitivity analysis studying the
  impact of selected variables on the profitability
  of the investment.
• Selected variables product price,
  electricity, heating, labor costs, initial
  capital investment, tax rate, production level,
  shrinkage rate, and discount rate.
• The variables were changed from 50 to 50
  of the estimated baseline values.

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Figure 3. Sensitivity of Net Present Value of
CEA Hydroponic System to Product Pricing Level
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Figure 4. Sensitivity of Net Present Value of CEA
Hydroponic System to Cost of Electricity
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Figure 5. Sensitivity of Net Present Value of
CEA Hydroponic System to Heating Cost
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Figure 6. Sensitivity of Net Present Value of
Ithaca CEA Hydroponic System to Selected Input
Variables
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CONCLUSIONS

• The top three locations for CEA hydroponic
  lettuce operation are Miami, Raleigh, and St.
  Louis.
• Modifications in the greenhouse structure and
  equipment are needed to increase efficiency for
  different climate areas.
• The education of the operators is crucial to
  provide expected production efficiency.
• Implication of a viable marketing program is very
  important since a price premium is essential to
  economic survival of the system.

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Further work has suggested that lettuce produced
in areas such as
Miami Raleigh St. Louis
Can be produced and transported at a lower cost
to areas such as
Chicago Los Angeles Ithaca
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Insights re Economic Viability of the CEA System
in the Northeast
Product quality and importance of local
production
State promotional programs
Survival of agriculture in metropolitan areas
Public policy question Should CEA facilities
receive breaks on utility rates as large
industrial firms do?
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DIRECT VARIABLE COSTS
Future of CEA