Financing and Marketing Management

Unit 4- Fishery Financial Management

4.6. Discounted Measures
Many economic decisions including fish production involve benefits and costs that are expected to occur at future time period. The construction of ponds race ways, and fish tank for example, requires immediate cash outlay, which with the production and sale of fish, will result in future cash inflows or returns. In order to determine whether the future cash inflows justify present initial investment, we must compare money spent today with the money received in the future.
The time value of money influences many production decisions. Everyone prefers money today to money in the future. Therefore in order to invest a rupee in fish production today, one must be guaranteed a return in the future that is equal to or greater than the rupee invested today. The preference for the rupee now instead of a rupee in the future arises from three basic reasons Uncertainty, Alternative uses and Inflation.
Uncertainty- influences preferences because one is never sure what will take place tomorrow
Alternative uses-it will determine whether one invests in one project or another and what would be the expected returns from such alternative investment.
Inflation-affects the purchasing power of the rupee
To compensate loss in purchasing power, uncertainty and alternative uses, interest rate is used as a mechanism. Suppose interest used for discounting is higher, then it implies that the degree of uncertainty is greater, inflation is higher and returns from alternative uses are higher. Often, the rate of interest is referred to as opportunity cost. Thus, opportunity cost reflects all the three factors.
The technique of discounting brings all projects to a common point of time and permits to determine whether to accept for implementation of projects that have variously shaped time streams i.e., patterns of when costs & benefits fall during the life of the project that differ from one another-and that are of different durations. The most common means of doing this is to subtract costs from the benefits in every time period usually one year, to arrive at the incremental net benefits stream-the so-called cash flow-and then to discount that. This approach will give one of three discounted cash flow measures of project worth-the net present worth (NPW), the internal rate of return (IRR) or the net benefit-cost ratio (B C Ratio). Another discounted measure is to find out the present worth of the cost and benefit stream separately and then divide the present worth of the cost and benefit stream separately and then to divide the present worth of the benefit stream by the present worth of the cost stream to obtain the benefit-cost-ratio.
Because the benefit and cost streams are discounted, the benefit-cost ratio is a discounted measure of project worth. But because the benefit and cost streams are discounted separately rather than subtracted from one another year-by-year, the benefit-cost ratio is not a discounted cash flow.