An Economic Analysis of Sisal Production in Madagascar - Report Example

An Economic Analysis of Sisal Production in Madagascar Name Institutional Affiliation Date Table of Contents Introduction 2 Economic Aspects of Sisal Production in Madagascar 3 Importance of the Sisal Industry in Madagascar 3 Profitability of Madagascan Sisal and Employment 4 Alternative forms of Agriculture that are Appropriate to Madagascar 4 Net Present Value (NPV) and Future Profitability 5 Methodology 17 Conclusion 18 Works Cited 19 Introduction The economy of Madagascar is purely agriculture despite the fact that its land is not suitable for cultivation. The land is extensively lateralized, mountainous and receives irregular rainfall. Agriculture contributes to about 30% of its GDP and employs about 75% of its workforce. The large-scale plantations are mainly for sisal production alongside bananas and sugarcane. Therefore, this report focuses on an in-depth economic analysis of sisal production in Madagascar. The research defines, in economic terms, the importance of economic industry to Madagascar and how sisal is profitable to Madagascar as one of the world economies. Further, the report explores other alternative agricultural forms that deem appropriate for Madagascar and that can be exploited in the future. The alternative form is discussed in terms of the required level of investment, employment levels and the related industry this can offer to the future of Madagascar. The valuable tools used herein include the use of spreadsheet for NPV and future profitability calculations. In the methodology section, the report discusses the assumptions used in this economic analysis alongside the research methodology used. Economic Aspects of Sisal Production in Madagascar There are several economical aspects surrounding the production of sisal in Madagascar. The climate condition of this country favours sisal production. For the last quarter of last year, 2013, the country suffered due to drought-like conditions where a drought was observed from September 2013. This lack of rain forced a lot of plantations to stop production of Sisal because cutting of the leaves in a drought-like condition would lead to damaging of the plant and would negatively impact on its fibre. However, when the rains started this year, the production of sisal went back to normal. Statistics show that in 2013, the country produced 8.823 mtons as compared to 8.246 in 2012 (Dolins et. al. 2013). The country exported about 7.175 in 2013 whereas in 2012 it exported 7.078 mtons. The production of Sisal in this country is outstripping due to reported shortages from other countries like Tanzania and Kenya. Importance of the Sisal Industry in Madagascar Sisal production is essential to Madagascar in many ways that benefit the rural, the semi-urban and the urban communities. The crop creates employment across different levels. For instance, the rural community benefits securing employment in sisal fiber extraction, sisal cultivation, grading, biogas generation activity, and handicrafts activity. The semi-urban community benefits from carpets and mats businesses, geo-textiles, paper board industry, the exporting of best anchor robes whereas the urban community exploits the use of composites for value added engineering products in the automobile industry for boats and railways (Dolins et. al. 2013) What is more, sisal is a source of mature and its extracts are rich for production of biogas to the rural Madagascan community. Profitability of Madagascan Sisal and Employment Sisal was traditionally used for agricultural twine because of its durability, strength, resistance to environmental deterioration, and ability to stretch. However, due to competition from the industry of polymers, some of this traditional uses of sisal are diminishing. Regardless of this, sisal is still profitable in the modern world for ropes, cordage, papers, doffing cloth, geotextiles, carpets, mattresses, dartboards, wire rope cores, macramé and handicrafts. It has more friendliness to the environment as compared to asbestos and the fiberglass used in the automobile industry. Spa products are also developed out of sisal plant, alongside products such as the rugs, cloths, slippers, lumbar belts used for support, disc buffers and cat scratching posts. Sisal employs about 75% of the workforce in Madagascar. This cuts across the rural homes, the semi-rural, and the urban (Dolins et. al. 2013). Alternative forms of Agriculture that are Appropriate to Madagascar It is worth noting that structures such as the growing chambers, greenhouses, and high tunnels have not been introduced in Madagascar. This implies that the country has a higher potential to exploit the resource in this field. Further, there is a higher potential for the country to invest in areas such as cultivation of sugar cane and cotton, raring of bees and the use of modern farming methods. For instance, bees benefit from the nectar out of sisal and rearing them alongside sisal will not demand for additional space. However, looking at the standards for sustainable strategies, the current farming methods in Madagascar are much below the required level. Some of the sustainable strategies include crop rotation and diversification. If this is employed in the country, it will allow crops and land use to meet a healthy standard over the years and in turn, will produce different number of crops. The country needs to invest on legislations to support crop farming within the country. Net Present Value (NPV) and Future Profitability In this section, the spreadsheet was used in coming up with values for Net Present Value and future profitability of the sisal industry in Madagascar. This has been broken down into the following sections and the results indicated herein. a. Net Present Value (NPV) and Profitability Index (PI) calculations. i. Reducing the investment by 5% each year for the next 50 years, the values obtained for NPV and Profitability Index are as shown bellow (Workings are shown in the Spreadsheet, Sheet Qi). YEARS NPV RATE[ (1-r)^n] present value(PV) CASH FLOW 0 1 (10,000,000.00) (10,000,000.00) 1 0.95 4,000,000.00 3,800,000.00 2 0.9025 4,000,000.00 3,610,000.00 3 0.857375 4,000,000.00 3,429,500.00 4 0.81450625 4,000,000.00 3,258,025.00 5 0.773780938 4,000,000.00 3,095,123.75 6 0.735091891 4,000,000.00 2,940,367.56 7 0.698337296 4,000,000.00 2,793,349.18 8 0.663420431 4,000,000.00 2,653,681.73 9 0.63024941 4,000,000.00 2,520,997.64 10 0.598736939 4,000,000.00 2,394,947.76 11 0.568800092 4,000,000.00 2,275,200.37 12 0.540360088 4,000,000.00 2,161,440.35 13 0.513342083 4,000,000.00 2,053,368.33 14 0.487674979 4,000,000.00 1,950,699.92 15 0.46329123 4,000,000.00 1,853,164.92 16 0.440126669 4,000,000.00 1,760,506.67 17 0.418120335 4,000,000.00 1,672,481.34 18 0.397214318 4,000,000.00 1,588,857.27 19 0.377353603 4,000,000.00 1,509,414.41 20 0.358485922 4,000,000.00 1,433,943.69 21 0.340561626 4,000,000.00 1,362,246.51 22 0.323533545 4,000,000.00 1,294,134.18 23 0.307356868 4,000,000.00 1,229,427.47 24 0.291989024 4,000,000.00 1,167,956.10 25 0.277389573 4,000,000.00 1,109,558.29 26 0.263520094 4,000,000.00 1,054,080.38 27 0.25034409 4,000,000.00 1,001,376.36 28 0.237826885 4,000,000.00 951,307.54 29 0.225935541 4,000,000.00 903,742.16 30 0.214638764 4,000,000.00 858,555.06 31 0.203906826 4,000,000.00 815,627.30 32 0.193711484 4,000,000.00 774,845.94 33 0.18402591 4,000,000.00 736,103.64 34 0.174824615 4,000,000.00 699,298.46 34 0.174824615 4,000,000.00 699,298.46 36 0.157779215 4,000,000.00 631,116.86 37 0.149890254 4,000,000.00 599,561.02 38 0.142395741 4,000,000.00 569,582.97 39 0.135275954 4,000,000.00 541,103.82 40 0.128512157 4,000,000.00 514,048.63 41 0.122086549 4,000,000.00 488,346.19 42 0.115982221 4,000,000.00 463,928.89 43 0.11018311 4,000,000.00 440,732.44 44 0.104673955 4,000,000.00 418,695.82 45 0.099440257 4,000,000.00 397,761.03 46 0.094468244 4,000,000.00 377,872.98 47 0.089744832 4,000,000.00 358,979.33 48 0.08525759 4,000,000.00 341,030.36 49 0.080994711 4,000,000.00 323,978.84 50 0.076944975 4,000,000.00 307,779.90   ∑CI =   70,187,146.80 Initial investment Cost ,C= (10,000,000.00) Profitability Index(PI)=PV of inflows/Initial Cost 7.01871468 PI= 7.02 n = period in years NPV = ∑CI – C NPV = 70187146.80-10000000 NPV= 60,187,146.80 ii. Increasing the investment by 5% each year for the next 50 years, the result for NPV and PI is as shown (Refer to working in Spreadsheet, Sheet Qii). YEARS NPV RATE CASH INFLOW CASH OUTFLOW 0 1 (10,000,000.00) (10,000,000.00) 1 1.05 4,000,000.00 4,200,000.00 2 1.1025 4,000,000.00 4,410,000.00 3 1.157625 4,000,000.00 4,630,500.00 4 1.2155063 4,000,000.00 4,862,025.00 5 1.2762816 4,000,000.00 5,105,126.25 6 1.3400956 4,000,000.00 5,360,382.56 7 1.4071004 4,000,000.00 5,628,401.69 8 1.4774554 4,000,000.00 5,909,821.78 9 1.5513282 4,000,000.00 6,205,312.86 10 1.6288946 4,000,000.00 6,515,578.51 11 1.7103394 4,000,000.00 6,841,357.43 12 1.7958563 4,000,000.00 7,183,425.30 13 1.8856491 4,000,000.00 7,542,596.57 14 1.9799316 4,000,000.00 7,919,726.40 15 2.0789282 4,000,000.00 8,315,712.72 16 2.1828746 4,000,000.00 8,731,498.35 17 2.2920183 4,000,000.00 9,168,073.27 18 2.4066192 4,000,000.00 9,626,476.93 19 2.5269502 4,000,000.00 10,107,800.78 20 2.6532977 4,000,000.00 10,613,190.82 21 2.7859626 4,000,000.00 11,143,850.36 22 2.9252607 4,000,000.00 11,701,042.88 23 3.0715238 4,000,000.00 12,286,095.02 24 3.2250999 4,000,000.00 12,900,399.77 25 3.3863549 4,000,000.00 13,545,419.76 26 3.5556727 4,000,000.00 14,222,690.75 27 3.7334563 4,000,000.00 14,933,825.29 28 3.9201291 4,000,000.00 15,680,516.55 29 4.1161356 4,000,000.00 16,464,542.38 30 4.3219424 4,000,000.00 17,287,769.50 31 4.5380395 4,000,000.00 18,152,157.98 32 4.7649415 4,000,000.00 19,059,765.87 33 5.0031885 4,000,000.00 20,012,754.17 34 5.253348 4,000,000.00 21,013,391.88 34 5.253348 4,000,000.00 21,013,391.88 36 5.7918161 4,000,000.00 23,167,264.54 37 6.0814069 4,000,000.00 24,325,627.77 38 6.3854773 4,000,000.00 25,541,909.16 39 6.7047512 4,000,000.00 26,819,004.62 40 7.0399887 4,000,000.00 28,159,954.85 41 7.3919881 4,000,000.00 29,567,952.59 42 7.7615876 4,000,000.00 31,046,350.22 43 8.1496669 4,000,000.00 32,598,667.73 44 8.5571503 4,000,000.00 34,228,601.12 45 8.9850078 4,000,000.00 35,940,031.17 46 9.4342582 4,000,000.00 37,737,032.73 47 9.9059711 4,000,000.00 39,623,884.37 48 10.40127 4,000,000.00 41,605,078.59 49 10.921333 4,000,000.00 43,685,332.52 50 11.4674 4,000,000.00 45,869,599.14 878,210,912.41 NPV= 868,210,912.41 Profitability Index(PI)=PV of inflows/Initial Cost PI= 87.82 iii. Maintaining investment at the current NPV level for the next 50 years, the results for NPV and PI are as shown (Refer to sheet Qiii) for workings) YEARS NPV RATE CASH INFLOW CASH OUTFLOW 0 1 (10,000,000.00) (10,000,000.00) 1 1 4,000,000.00 4,000,000.00 2 1 4,000,000.00 4,000,000.00 3 1 4,000,000.00 4,000,000.00 4 1 4,000,000.00 4,000,000.00 5 1 4,000,000.00 4,000,000.00 6 1 4,000,000.00 4,000,000.00 7 1 4,000,000.00 4,000,000.00 8 1 4,000,000.00 4,000,000.00 9 1 4,000,000.00 4,000,000.00 10 1 4,000,000.00 4,000,000.00 11 1 4,000,000.00 4,000,000.00 12 1 4,000,000.00 4,000,000.00 13 1 4,000,000.00 4,000,000.00 14 1 4,000,000.00 4,000,000.00 15 1 4,000,000.00 4,000,000.00 16 1 4,000,000.00 4,000,000.00 17 1 4,000,000.00 4,000,000.00 18 1 4,000,000.00 4,000,000.00 19 1 4,000,000.00 4,000,000.00 20 1 4,000,000.00 4,000,000.00 21 1 4,000,000.00 4,000,000.00 22 1 4,000,000.00 4,000,000.00 23 1 4,000,000.00 4,000,000.00 24 1 4,000,000.00 4,000,000.00 25 1 4,000,000.00 4,000,000.00 26 1 4,000,000.00 4,000,000.00 27 1 4,000,000.00 4,000,000.00 28 1 4,000,000.00 4,000,000.00 29 1 4,000,000.00 4,000,000.00 30 1 4,000,000.00 4,000,000.00 31 1 4,000,000.00 4,000,000.00 32 1 4,000,000.00 4,000,000.00 33 1 4,000,000.00 4,000,000.00 34 1 4,000,000.00 4,000,000.00 34 1 4,000,000.00 4,000,000.00 36 1 4,000,000.00 4,000,000.00 37 1 4,000,000.00 4,000,000.00 38 1 4,000,000.00 4,000,000.00 39 1 4,000,000.00 4,000,000.00 40 1 4,000,000.00 4,000,000.00 41 1 4,000,000.00 4,000,000.00 42 1 4,000,000.00 4,000,000.00 43 1 4,000,000.00 4,000,000.00 44 1 4,000,000.00 4,000,000.00 45 1 4,000,000.00 4,000,000.00 46 1 4,000,000.00 4,000,000.00 47 1 4,000,000.00 4,000,000.00 48 1 4,000,000.00 4,000,000.00 49 1 4,000,000.00 4,000,000.00 50 1 4,000,000.00 4,000,000.00 200,000,000.00 NPV= 190,000,000.00 Profitability Index(PI)=PV of inflows/Initial Cost PI= 20.00 b. Running scenario (i) where new agriculture competes and replaces the earlier enterprises the values for NPV and PI , alongside the graphical analysis are as shown. ( Refer to workings in Excel sheet Q3b (i), Q3b (ii), Q3b (iii), Q3b (iv), Q3b (v), and Q3b (vi)) i. NPV= 91,172,812.50 Profitability Index(PI)=PV of inflows/Initial Cost PI= 10.12 ii. NPV = 49,855,220.27 Profitability Index(PI)=PV of inflows/Initial Cost PI= 5.99 iii. NPV= 30,096,839.49 Profitability Index(PI)=PV of inflows/Initial Cost PI= 4.01 iv. NPV = 19,290,404.58 Profitability Index(PI)=PV of inflows/Initial Cost PI= 2.93 v. NPV= 12,662,352.65 Profitability Index(PI)=PV of inflows/Initial Cost PI = 2.27 iv. NPV= 19,290,404.58 Profitability Index(PI)=PV of inflows/Initial Cost PI= 2.93 v. NPV = 12,662,352.65 Profitability Index(PI)=PV of inflows/Initial Cost PI = 2.27 vi. NPV = 8,222,173.60 Profitability Index(PI)=PV of inflows/Initial Cost PI= 1.82 Methodology The research explores the use of secondary information about sisal production in Madagascar. 111Equation Chapter 1 Section 1In order to achieve the calculations herein, the following are the general assumptions that were made: The initial investment cost was assumed to be C= $10000000 Annual cash inflow is constant at $ 4000000 Annual cash inflow = Net Income + Depreciation To generate the cash flow column, the following expression is used, Cash Flow, C1 = PV [(1+r) n] 212\* MERGEFORMAT (.) Where PV= Present value n= period in years r = Discount Rate (%) Net Present Value (NPV) = ∑C1-C 313\* MERGEFORMAT (.) Profitability Index (PI) = Cash Flow/Initial Cost =∑C1/C 414\* MERGEFORMAT (.) The calculation made is this report has also assumed there was no major or minor political impact that would have affected the results. Conclusion This economic analysis report has exposed the production of sisal in Madagascar. The research has defined, in economic terms, the significance of economic industry to Madagascar right from its products to creation of employment and how sisal is profitable to Madagascar as one its exports. Further, the report has explored other alternative agricultural forms such as bee farming, and sugarcane growing that deem appropriate for Madagascar and that can be exploited in the future. The alternative forms are discussed in terms of the required level of investment such setting up of processing industries, employment levels and the related industry they can offer to the future of Madagascar. The valuable tools used within the report include the use of spreadsheet for NPV and future profitability calculations. In the methodology section, the report discusses the assumptions used in this economic analysis. Works Cited Dolins, Francine L, Alison Jolly, Hantanirina Rasamimanana, Jonah Ratsimbazafy, Anna T. C. Feistner, and Florent Ravoavy. "Conservation Education in Madagascar: Three Case Studies in the Biologically Diverse Island-Continent." American Journal of Primatology. 72.5 (2013): 391-406. Print. Read More