- 5 - 



Th 

 per yea 

 the net 

 value o 

 ard to 

 net inc 

 come £o 

 ized" n 

 cipated 

 orchard 



e technique 

 r over the 



present va 

 btained in 

 obtain an " 

 ome from st 

 r the next 

 et income f 

 net income 

 should be 



involves three 

 life of the new 

 lue of the orcha 

 step one is amor 

 annualized" net 

 ep two is compar 

 year from the ex 

 rom the proposed 



for the next ye 

 replaced. 



steps 



orcj^a 



rd.^ 



tized 



incom 



ed wi 



istin 



new 

 ar fr 



First, annual net returns 

 rd are discounted to obtain 

 Second, the net present 

 over the life of the orch- 

 e. Third, the "annualized" 

 th the anticipated net in- 

 g orchard. If the "annual- 

 orchard exceeds the anti- 

 om the old orchard, the old 



A simple example may be helpful. The following table presents 

 the life cycle cash flow for Red Delicious apples sold on the fresh 

 market. 



Table 1 



Age of 

 Orchard 



Life Cycle 

 creases at 



Cash Flow Per Acre (With Projected Price In- 

 2.9 Cents Per Bushel Per Year) 



Net Cash 

 Income 



Age of 

 Orchard 



Net Cash 

 Income 



Age of 

 Orchard 



Net Cash 

 Income 



The present value formula with uneven income streams is as 

 follows: 



PV = ^1 + ^2 



TT^TT 



(1 + i) 



R 



n 



(Ui) 



n 



where R^^ to R = the atinual net returns in each year 

 i^ = the appropriate interest rate 



Calculating the present value of a future return is the reverse 

 of compounding interest. If we compound 95 cents at 5-1/4 per- 

 cent simple interest, we have one dollar at the end of the year. 

 Therefore, the present value of one dollar received one year from 

 now, given a 5-1/4 percent interest rate is 95 cents. 



"^The following costs are not considered since they are irrelevant 

 to the replacement decision: all fixed costs for equipment and 

 buildings and land charges. 



