Use this calculator to do a quick check on the annual $ returns from operating an irrigation system.
If you use both columns, you can compare the costs and returns from any two irrigation systems. For example, if you are thinking of changing your irrigation system, you can enter values for your current system in the 'system 1' column, and estimated costs for a proposed system in the 'system 2' column, and find out whether your proposed system warrants further investigation.
|Costs per year ($/y)||System 1||System 2||Calculations used|
|Pumping costs:||Pumping costs = [a] × [b] × [c] |
that is, irrigated area [a] × pumping cost/ML [b] × water used [c]
|Labour costs:||Labour costs = [h] × [i]|
that is, yearly labour in hours [h] × labour cost in $/h [i])
|Depreciation:||Depreciation = ( [d] – [g] ) ÷ [f]|
that is, ( capital cost [d] – resale value [g] ) ÷ years of working life [f]
|Interest:||Average capital value = ( capital cost [d] + resale value [g] ) ÷ 2|
Interest = average capital value × interest rate [e] ÷ 100
|Repairs:||Repairs = yearly repair cost [j]|
|Cost:||Costs per year = pumping cost + labour cost + depreciation + interest + repairs|
|Net margin:||Net margin per year = gross margin income/ha [k] × irrigated area [a] – costs per year + pumping costs|
|Return on investment (%):
[Return on capital cost]
|Return on investment (%) = Net margin per year ÷ capital cost × 100|
The main shortcoming of this calculator is that it works on yearly averages. Usually, in practice, there is a large initial outlay, and it is some time before the benefits from this outlay produce additional income or reduced operating costs.
The calculator does not use discounting. Discounting might alter the appeal of different projects. If you are considering a large outlay, do a more detailed investment analysis that accounts for the projected flow of costs and income over the life of the new system. As a minimum extra step, you should prepare a cash flow budget to ensure you have the cash flows to handle the investment. The results from this calculator should indicate if the difference in the annual net margin can provide loan repayments or an adequate return on the capital invested.
Enter the area to be irrigated in hectares. If water is limited and you expect to apply different rates per hectare with the existing and proposed system, then the total area to be irrigated may be determined by the available water. Say you have a system capable of watering 40 ha, and usually apply 6 ML per hectare with it. If the new system applies 6.5 ML per hectare, and you still have only 240 ML of water available, then you will need to reduce the area to 36.9 ha (= 240 ML ÷ 6.5). If you are considering a centre pivot system, remember the corners may not be irrigated. Only count the area irrigated.
How many hours labour is needed to set up, operate and maintain the irrigation system? Take care not to double-count these values. If labour costs are allowed in the gross margin calculations in [k], they should not be included here, and vice-versa.
This is always difficult to estimate. Repairs vary from year to year. A rate of 2% of the new value of the equipment is suggested as a rate to use for new equipment, but for old equipment a rate of 5% is suggested. Repair costs often vary considerably between one operator and the next. Adequate care and attention to maintenance can minimise the costs considerably.
Variable costs are those costs that vary directly with the area grown, including seed, fertiliser, fuel, sprays for crop protection, water pumping costs, repairs and contracting.
Different irrigation systems can result in different crop gross margins. This can happen when:
A different system may reduce water wastage and enable more hectares to be irrigated. It may increase water usage but may also increase the tonnes produced per ML of water. Per hectare yields may increase proportionally more than the increase in water use.
More information available below.
The net margin per year can be compared with the initial capital outlay to consider the return on investment. The result from this calculator indicates which systems are worth more detailed analysis:
Note that sample data have been entered in the calculator — hitting the 'reset' and then 'calculate' buttons at the end of the table will retrieve these sample figures.
The sample figures in the 'system 1' column of the irrigation system cost calculator give these results:
|Costs per year ($/y)||System 1|
|= 40 ha × $25/ML × 5.5 ML/ha||= $5,500|
|= 1000 hours × $15||= $15,000|
|= ($20,000 – $2,000) ÷ 5 years||= $3,600|
|= ($20,000 + $2,000) ÷ 2 × 8%||= $880|
|= ($850 × 40 ha) – $27,480 + $5,500||= $12,020|
The same measures for the 'system 2' values give these results:
|Costs per year ($/y)||System 2|
|Pumping cost||= 40 ha × $18/ML × 6.2 ML/ha||= $4,464|
|Labour cost||= 100 hours × $15||= $1,500|
|Depreciation||= ($110,000 – $35,000) ÷ 25 years||= $3,000|
|Interest||= ($110,000 + $35,000) ÷ 2 × 8%||= $5,800|
|Total costs||= $15,264|
|Net margin||= ($925 × 40 ha) – $15,264 + $4,464||= $26,200|
One way of working out if a system is cost-effective is to compare the annual net margin of the system ($12,020 for system 1) to its initial capital cost ($20,000). Remember that interest and depreciation have already been taken into account in the calculations, but principal repayments have not been allowed for.
To compare the two systems, estimate a return on capital invested, after interest. You can do this by dividing the net margin by the initial capital cost.
As a rule of thumb, you should look for an improvement in the net margin of at least 10% — preferably at least 15%. You can then decide to go ahead with a change in system depending on the returns from this project compared with other projects, the levels of risk involved, and the cash flow projections.
Here is this comparison for the two sample systems:
(Net annual margin, system 2 – net annual margin, system 1) ÷ system 2 outlay = ($26,200 – $12,020) ÷ $110,000 = $14,180
$14,180 ÷ $110,000 = 12.9%
At 12.9%, this investment would be regarded as marginal. There may be better investment alternatives.