1. Analysis by GUNES ILASLAN, Ph.D. THE INVESTMENT ANALYSIS OF CEA HYDROPONIC SYSTEM GROWING BOSTON LETTUCE Modified by Georgia Agricultural Education Curriculum Office July, 2002

2. Contents of The Presentation Selected Locations of CEA Hydroponic Operations Economic Model and Methodology Operating and Production Costs Sensitivity Analysis Conclusions

3. Figure 1. Selected US Locations for CEA Hydroponic Operations Figure 1. Selected US Locations for CEA Hydroponic Operations

4. Figure 2. Economic Model and Methodology for Capital Investment Analysis Total Before Tax Revenue Product Shrinkage Direct Variable Costs Labor Costs Overhead Costs Indirect Variable Costs Initial Investment Costs Net Present Value of Investment Asset Replacement Costs Salvage Value of Investment Total After Tax Cash Inflows NPV Discount Factor Price Total Before Tax Cash Outflows Tax Savings from Depreciation After Tax Net Cash Flow

5. SALES & REVENUES Annual Production: 344,925 heads/year Shrinkage: 3% Grower Price: Breakeven Price

6. 50% Debt and 50%Equity Cost of Equity: 14% Loan Interest Rate: 8.5% Discount Rate: 8% (The Weighted Average Cost of Capital After Taxes) FINANCING of the INVESTMENT

7. Table 1. Total Capital Investment Costs

8. COSTS of PRODUCTION Direct Variable Costs:Direct Variable Costs: Seed, Fertilizer, Media, Oxygen, Plastic Package, and Shipping Container Indirect Variable Costs:Indirect Variable Costs: Electricity, Heating, Water&Sewer, Freight Expenses, Telephone, Office Expenses, Labor Fixed Costs:Fixed Costs: Insurance, Property Tax, Repairs and Maintenance, Miscellaneous

9. DIRECT VARIABLE COSTS

10. FIXED/OVERHEAD COSTS

11. INDIRECT VARIABLE COSTS

12. Table 2. The Product Price and Price Premiums for CEA Hydroponic Lettuce

13. SENSITIVITY ANALYSIS One-way sensitivity analysis studying the impact of selected variables on the profitability of the investment. Selected variables: product price, electricity, heating, labor costs, initial capital investment, tax rate, production level, shrinkage rate, and discount rate. The variables were changed from +50% to –50% of the estimated baseline values.

14. Figure 3. Sensitivity of Net Present Value of CEA Hydroponic System to Product Pricing Level

15. Figure 4. Sensitivity of Net Present Value of CEA Hydroponic System to Cost of Electricity

16. Figure 5. Sensitivity of Net Present Value of CEA Hydroponic System to Heating Cost

17. Figure 6. Sensitivity of Net Present Value of Ithaca CEA Hydroponic System to Selected Input Variables

18. CONCLUSIONS The top three locations for CEA hydroponic lettuce operation are: Miami, Raleigh, and St. Louis. Modifications in the greenhouse structure and equipment are needed to increase efficiency for different climate areas. The education of the operators is crucial to provide expected production efficiency. Implication of a viable marketing program is very important since a price premium is essential to economic survival of the system.

19. Further work has suggested that lettuce produced in areas such as: Miami Raleigh St. Louis Can be produced and transported at a lower cost to areas such as: Chicago Los Angeles Ithaca

20. Insights re: Economic Viability of the CEA System in the Northeast Product quality and importance of local production State promotional programs Survival of agriculture in metropolitan areas Public policy question: Should CEA facilities receive breaks on utility rates as large industrial firms do?

21. DIRECT VARIABLE COSTS Future of CEA