One obvious problem with the SNPV is that it cannot be calculated if there is not a satisfactory estimate of the "opportunity cost of
capital" (Gittinger, 1972, p.75). Individuals vary in their time
preferences so that, the higher they value of their present
consumption, the higher will be the minimum acceptable rate of return on capital. But the level of time preference generally varies according the level of income. Because poor farmers want to survive until the
next harvest ‘ rather than invest for the future, they will invest only in those activities which provide a relatively high rate of discounted
return. Moreover, attitudes to saving and investment vary over an
individuals life-time, mostly influenced by life expectancy. As a
result, a farmer may discount future returns more heavily as he grows older, or he may not be willing to make more sacrifices. Therefore there may be a high discount rate.
Because of the complexity of the problem of personal discount rates, the decision maker may decide to use a set of different discount
rates in the calculation in a form of "Sensitivity Analysis” . As
Gittinger (1982, p.314) suggested the "Opportunity cost of capital" is the best discount rate if it is correct to to assume that every farmer has an equal opportunity to invest money in the bank. In this study, a rate of 13.5 per cent is used as discount rate. This is the maximum
rate on deposits with the commercial bank of Nepal on two-year
deposits. This is an extremely high real rate of discount to use since the recent rate of inflation in Nepal has been about 12 per cent (12.4 per cent in 1983) implying a real bank rate of only about one or two per cent. Such a low rate of discount is considered unreasonable for poor communities and the selected rate has the added advantages of being conservative for the assesment of the proposals and being close to the rates used (12 and 14 per cent) in the R/N IRD Second Phase Project Preparation Report (1983).
3.10 Sensitivity Analysis
Profitability and hence decision making depend entirely on the accuracy of prices, yields, cost and discount rates. In the real world,
risks and uncertainties are difficult to quantitify. Therefore a lot of assumptions have to be made for valid and conclusive decisions. Thus, sensitivity analysis must be done to calculate the effects of changes in key assumptions. It may be used to test what happens to the earning capacity of the project if events differ from guesses made about them
in planning (Gittinger, 1982, p.363). In this study, the highly
variable constraints, namely costs, prices, and yields are subjected to sensitivity tests to determine the extent to which profitability is affected.
3.11 Data
The input-output data for economic analysis were assembled from a wide variety of reports: primarily from the R/N IRDP, Second Phase Preparation Report, 1983, Census data of Rasuwa District, 1981, and the Agricultural Diary, 1985, prepared for extension workers. The data were converted into periodic bases from these reports, in consultation with
agricultural and horticultural experts in Nepal by telephone and
letter, and from personal experience in the study area, as one of the members of the project preparation team in R/N IRDP, 1983. Moreover,
the data were doubled checked by library research of comparable
situations in India. To make it as authentic as possible, a cross check of inputs and outputs were made between different sources.
3.12 Limitations of Study
This study is confined to the observation and the diagnosis of the problems of one particular region in the Hills of Nepal and the design of a Horticultural project, as it might be seen from the farmers point
of view. Because of limitations of time and data, it does not take
into consideration a full economic and social cost benefit analysis from the National point of view. Neither does the study examine the
transportation and marketing aspects in detail. nor the detail
organization and management of the Small Farmers Group (SFG) orchards and their credit requirements. This study should be viewed as an early
iteration in the Diagnosis and Design procedures (Figure 3-1)
attempting to examine in detail some possible improvements in the
profitability of "pakho" land in the Hills. It questions whether the increased profitability or productivity are sustainable and stable and briefly looks the equitability issues. Further studies will be needed to verify and modify the findings.
3.13 Conclusion
This chapter highlights the methods of farm planning in the Hills, uses of multi-period multi-enterprises budgeting, decision criteria for the profitability of the projects, the MULBUD computer package, sources
of data and the limitation of the study. The financial criteria
(Annuity), IRR and B/C ratio used for comparing and ranking of different farming modeis. The MULBUD computer package facilitates the
economic assesments of horticultural tree crops as well as
intercropping models. It shows the dynamic view a of farm's movement towards " maturity". The budgeting techniques used do not give optimum solutions but alternatives. Keeping in mind these alternatives, the decision makers can make their final decision for the suitability of the models. The following Chapter discusses the assumptions behind the enterprise data sets.
CHAPTER 4