Economic Summary

• Revenue - Revenue on an annual basis
  • Annual revenue is a key financial metric that reflects the top line of your company's income statement, equaling the total amount of money your business earns during a fiscal year, before expenses.
• Gross Income - Gross Profit on an annual basis before tax
  • Gross income is calculated by subtracting the cost of production (cost of materials, labor, and other operating expenses) from the total revenue generated by your company.
  • This metric does not include expenses related to selling, general, and administrative expenses or other non-operating expenses.
  • Gross income provides insight into your farm's ability to generate profit from its core business operations.
• Cumulative Profit - Gross Profit accumulated over time
  • Cumulative profit refers to the total profit your business will accrue since its inception, i.e. the Start Year specified in your project settings.
  • This metric accounts for all revenue earned and expenses incurred during a given timeframe. Expenses include operating expenses, taxes, interest.
  • This metric is used to analyze your farm’s growth trajectory, ability to generate consistent earnings, and long-term sustainability.
• Opex - Annual Operating Expenses
• Capex - Annual capital expenses, equipment, trees, and infrastructure

IRR - Internal Rate of Return, a financial measure of the profitability of the investment

IRR (Internal Rate of Return)

• IRR is a financial metric that brings future cash flows into the present, commonly used to measure the profitability of long-term investments with distant future returns, such as agroforestry systems.

• The textbook definition of IRR is “the discount rate at which your investment’s Net Present Value (NPV) equals 0.”

  • NPV represents the difference between cash inflows and cash outflows over time, with cash flows discounted according to a discount rate.

  $NPV = \frac{Cash Flow₁}{(1 + r)₁} + \frac{Cash Flow₂}{(1 + r)₂)} + ... + \frac{Cash Flowₙ}{(1 + r)ₙ} - Initial Investment$

  where r = the discount rate and n = the number of periods

  • A “discount rate” is the rate at which future cash flows from an investment are reduced to their present value. This assumes that cash flows in the future are less valuable than cash flows today, which makes sense, given that cash flows today can be reinvested and are not subject to inflation.
  • Thus when NPV = 0, as is the case in the calculation of your IRR, the sum of all future cash flows equals the initial investment.

• In interpreting your IRR, a project with a high IRR (e.g. 10%) can be seen as a better investment, indicating your rate of return exceeds the cost of capital. By contrast, low or negative IRR (e.g. -1%) indicate low profitability and a poor investment, suggesting your rate of return is small relative to or less than your initial investment. An IRR of 0 suggests no returns.

• Practically, IRR is used as a benchmark against a project’s discount rate and interest rate to determine the viability of an investment. It allows investors to compare projects of different sizes to determine the better investment opportunity.