Developing a capital investment and finance decision tree for alternative energy resources at a vegetable farm

Abstract

Background: Electricity is a day to day necessity. When looking at Eskom as the only electricity supplier in South Africa, with the constant increase in coal prices and thus electricity prices it is clear that if a business is looking at sustainable energy resources, they will have to start investigating alternative energy methods to supply energy to the business. This study gave businesses the insight into the much unknown field of decision making in regards to alternative energy resources. Objectives: The objective of this study was to investigate whether alternative energy can be purchased for the vegetable farm and how it will be financed. This was done by doing a capital investment decision to consider whether to continue with Eskom electricity or switch over to alternative energy resources. After the capital investment decision, a finance decision was made to determine whether such investment will be financed or bought with the company's own funds. Design and method: The study comprised a literature review and an empirical study. A literature review was undertaken to determine what different energy resources are available; what the capital investment decision entails and what financial analysis can be done to determine the options that are available for implementing alternative energy resources. The empirical study was in the form of a case study. Through the case study an interview was conducted and document analysis was done on the financial statements and monthly management reports. The capital investment decision was made by using the following capital budgeting techniques: net present value (NPV), internal rate of return (IRR) and discounted payback period. For the financing decision the following ratios were taken into consideration; times interest earned and debt-equity ratio, to determine whether there is scope for additional financing. The current ratio was done, to determine the liquidity of the company and whether there is cash available to purchase the alternative energy resource from the company's own funds. Findings and conclusion: The capital investment decision-making techniques were executed and it was determined that implementing solar energy on the farm will be a good capital investment due to the fact that the result of the NPV calculation was positive. The finance decision was also investigated and it was concluded that no additional debt must be acquired. The liquidity of the company indicated that the company will have trouble servicing its current short-term debt and therefore it can be determined that it is not viable to acquire solar power. A decision tree was then created to be an aid for various businesses when they experience similar research questions. Practical implication: The decision tree could form the basis to be used in future by similar entities in the decision-making process in regards to alternative energy resources. As alternative energy is still a relatively new and unexplored field for businesses, this new knowledge will be of great value when working with capital investment and financing decisions regarding alternative energy resources. Value of the research: This study focused on the financial aspect of alternative energy and assistance is given to a farmer when they want to investigate the alternatives to Eskom electricity. With the decision tree the steps are defined; in the process from choosing an alternative energy option until the implementation of such an option. Research limitations: Alternative energy is still a relatively new field and the effect of the implementation of alternative energy on the environment are not yet known, this will only be known in the future after years of implementation. Fossil fuels however are being depleted from the earth and that is why when a decision regarding alternative energy had to be taken, only renewable resources were considered. Areas for future research: The same study can be performed, but with the focus on other farming activities or businesses. A study can also be performed with the focus on a hybrid solar system.