Division of Agricultural UNIVERSITY OF CALIFORNIA BY EDWIN FARIS AND A. DOYLE REED CALIFORNIA AGRICULTURAL Experiment Station CIRCULAR 512 should you replace your cling peach trees? This depends on • the yield from your present trees and • the yield you expect from the replacement trees If you have a low-yielding orchard right now, for instance, and you intend to replace it with a high-yielding peach variety, pull the present stand immedi- ately. But if you expect the replacements to be only medium-high yielding, wait until the present trees are age 22. The following table can be used as a rough guide for replacement. GUIDE TO REPLACING CLING PEACH TREES Replace them with . . . If your present trees yield. . . oo 6b ^ LOW MEDIUM LOW MEDIUM HIGH HIGH X HIGH- YIELDING TREES As soon as possible Either at end of 6th year or after age 18 After age 19 After age 28 After age 22 MEDIUM HIGH- YIELDING TREES After age 26 After age 26 After age 32 or when yields decrease to 13.5 tons per acre After age 26 After age 31 MEDIUM LOW - YIELDING TREES After age 31 After age 32 or when yields decrease to 12.5 tons per acre X LOW- YIELWNG TREES After age 29 After age 32 or when yields decrease to 11.5 tons per acre After age 32 or when yields decrease to 11.5 tons per acre After age 32 or when yields decrease to 11.5 tons per acre ^Important: The figures given in table 1 on page 4 show the tons per acre used in this circular as a basis for each of the four yield levels. Your own yields may vary from these, changing the age when you should replace present stands. Although the table opposite gives a rough estimate of replacement ages, you may need more accurate information. This circular contains specific instructions on how to compare the income from present trees with the future income you expect from replacement trees. On the blank tables provided, you can fill in information from your own orchard. Each table represents one of five simplified steps leading to a comparison of the value of present and replacement trees. Comparing Present and Replacement Trees in FIVE STEPS STEP 1. Make a table of earnings from present trees STEP 2. Make a table of expected future earnings from replacement trees STEP 3. Discount the value of future earnings from replacement trees STEP 4. Amortize this value STEP 5. Compare . . . rees Annual income ivith When the present Repla fMj J rees Highest? presenl^jfalue of future earnings {discounted and amortized)^ i^JjSk When this is higher, replace the present st£nd. TABLE 1 Four Yield Levels in Cling Peach Trees* Yields expected per acre Age of tree Low Medium-low Medium-high High 1 2 3 4 years tons 1.0 4.0 8.0 12.8 14.5 15.0 15.0 15.0 15.0 15.0 14.9 14.9 14.8 14.8 14.7 14.5 14.4 14.2 14.0 13.8 13.6 13.4 13.0 12.8 12.5 12.1 11.7 11.3 tons 1.0 5.5 8.5 14.0 15.5 16.0 16.0 16.0 16.0 16.0 16.0 16.0 16.0 16.0 16.0 15.9 15.8 15.6 15.3 14.8 14.5 14.4 14.1 13.9 13.6 13.4 13.1 13.0 tons 1.0 5.5 8.5 14.0 16.2 17.8 18.7 19.2 19.4 19.3 19.0 18.6 18.2 17.7 17.3 16.8 16.2 15.6 15.3 14.8 14.5 14.4 14.1 13.9 13.6 13.4 13.1 13.0 tons 1 2 3 2.0 4 5 6.5 12.0 6 17.3 7. 19.0 8 20.0 9 20.5 10. 21.0 11 21.0 12 21.0 13. 21.0 14 21.0 15 20.9 16 17 20.5 20.1 18 19.8 19 19.4 20 19.0 21 22 18.6 18.1 23 24 25 26 17.8 17.5 17.1 16.8 27 28 29 16.5 16.0 15.7 30 15.5 The tons per acre given in this table are the basis for the four yield levels used throughout the circular. MAY, 1962 THE AUTHORS: J. Edwin Faris is Associate Professor of Agricultural Economics and Associate Agricultural Economist in the Experiment Station and on the Giannini Foundation, Davis. A. Doyle Reed is Agriculturist, Agricultural Extension, and Associate on the Giannini Foundation, Davis. WHEN TO RIPLACI CLING PEACH THE IS J. EDWIN FARIS • A. DOYLE REED Peciding when to replace cling peach trees is probably one of your most difficult tasks as an orchard manager. The yield from present trees is always the basis from which you start. Before you can make a de- cision, there are several steps you must go through. Suppose you have an acre of trees which you think should be replaced sometime soon. They are 26 years old, giving a medium-high yield (see table 1 for figure on the four yield levels) of 13.9 tons an acre. The market price is $60 a ton. Your gross income from this particular acre is $834 ( 13.9 x $60); your costs may be $693, leaving a net income of $141. You have a choice — you can keep the present trees a few more years, although the yield is going down yearly. Or you can replace them. These are the steps you will go through in making your decision. STEP 1— MAKE A TABLE OF EARNINGS ON PRESENT TREES We'll assume that you have kept good records and you know the yields per acre, the prices you were paid per ton, the annual costs for every year up to the present, and your net income (gross income minus costs). In the first years you undoubtedly showed a loss, because even after the trees began bearing you probably had to repay a loan from the bank (at perhaps 6 per cent interest) to help finance establishing the orchard. This is added into your yearly costs. Your records might look something like table 2. You will see the $141 net income for year 26 near the bottom of column 4. You look ahead to next year when you expect the yield to drop to 13.6 tons per acre, bringing your net income down to $127. These are the two figures you start with in making your decision about replacement. STEP 2— MAKE A TABLE OF EARNINGS YOU EXPECT FROM THE REPLACEMENT TREES Well assume that your replacement trees will bring you about the same yield and income for the next 26 to 27 years as your present or- chard has for the past 26 to 27 years (that is, you expect to replace medium-high-yielding trees with trees of the same yield level). If costs should go up or down, prices would likely go up or down proportion- TABLE 2 Sample Table of Earnings from Present Orchard (Medium-high yielding) Age of tree Yield per acre Gross income at $60 per ton Annual costs including interest on unpaid balance at 6 per cent Annual net in- come per acre 1 2 3 4 years 1 2 tons 1.0 5.5 8.5 14.0 16.2 17.8 18.7 19.2 19.4 19.3 19.0 18.6 18.2 17.7 17.3 16.8 16.2 15.6 15.3 14.8 14.5 14.4 14.1 13.9 13.6 13.4 13.1 13.0 dollars $ 60 330 510 840 972 1,068 1,122 1,152 1,164 1,158 1,140 1,116 1,092 1,062 1,038 1,008 972 936 918 888 870 864 846 834 816 804 786 $ 780 dollars $283 216 250 287 452 529 686 722 754 790 757 762 766 762 757 752 744 738 732 724 716 712 705 701 700 696 693 689 686 682 $681 dollars $-283 -216 -250 -227 -122 - 19 154 250 314 332 395 402 392 378 359 340 318 300 276 248 220 206 183 169 164 150 141 -• 127 "• 118 104 $ 99 3. . 4. . 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 . . 24 25 26 . 27 28. . 29 . 30 ately. Therefore, your net income might very well remain about the same. If the expected net income from the replacement trees is the same as that from your present orchard, you will expect to earn $141 during year 26. However, the future income of $141 is not worth as much to you today as the $141 you are earning on your present trees. The present cash value of the future income is considerably less than $141. To de- termine how much less you would — STEP 3— DISCOUNT THE VALUE OF FUTURE EARNINGS ON THE REPLACEMENT TREES To determine the present value of future earnings, you ask yourself, how much would I have to invest today, at 5 per cent interest for ex- 6 ample, in order to have a total of $141 in 26 years? The simplest way to determine this is to use the Present Value Table, a table used by lending companies when they calculate the present value of future in- come (see table 3). To use the table, you simply multiply the expected income for a given year by the appropriate discount factor. Thus for year 26, if you use a discount rate of 5 per cent, your calculation would be: $141 x .281 = $40 TABLE 3 Present Value Table* Year Present value of $1.00 future earnings using a discount rate of 3 per cent 5 per cent 6 per cent 8 per cent 1 2 3 4 1 $0,971 .943 .915 .888 .863 .837 .813 .789 .766 .744 .722 .701 .681 .661 .642 .623 .605 .587 .570 .554 .538 .522 .507 .492 .478 .464 .450 .437 .424 .412 .400 $0,388 $0,952 .907 .864 .823 .784 .746 .711 .677 .645 .614 .585 .557 .530 .505 .481 .458 .436 .416 .396 .377 .359 .342 .326 .310 .295 .281 -* .268 .255 .243 .231 .220 $0,210 $0,943 .890 .840 .792 .747 .705 .665 .627 .592 .558 .527 .497 .469 .442 .417 .394 .371 .350 .331 .312 .294 .278 .262 .247 .233 .220 .207 .196 .185 .174 .164 $0,155 $0,926 .857 .794 .735 .681 .630 .583 .540 .500 .463 .429 .397 .368 .340 .315 .292 .270 .250 .232 .215 .199 .184 .170 .158 .146 .135 .125 .116 .107 .099 .092 $0,085 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 * Multiply expected annual income from replacement trees by the discount factor for that year to get the present discounted value. In other words, if you invested $40 at 5 per cent interest today you would have a total of $141 in 26 years, provided you had reinvested the interest every year. Thus the $141 future earnings is worth only $40 to you today. This $40 is the present discounted value of future income. Your next step is to make this calculation for each of the 26 years you expect to have the replacement trees. The following table (table 4) shows these calculations for the 26-year period. (Note that for the first five years costs are greater than the gross income, so that the net income is a minus figure.) Column 5 gives you a running total of column 3. Thus in year 26 you have a total of $1,833. This is the accumulated present value (discounted at 5 per cent) of your future earnings for all 26 years. TABLE 4 How to Calculate the Present Value of Future Income from Replacement Trees' Year Expected annual net income per acret Present value discount factor X for a 5 per cent rate! Annual Previous present year's value, -j- accumulated discounted value Present value — accumulated and discounted At planting 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 $-283 -216 -250 -227 -122 - 19 154 250 314 332 395 402 392 378 359 340 318 300 276 248 220 206 183 169 164 150 $141 No calculation at time of planting .952 .907 .864 .823 .784 .746 .711 .677 .645 .614 .585 .557 .530 .505 .481 .458 .436 .416 .396 .377 .359 .342 .326 .310 .295 .281 $-283 -206 -226 -196 -100 - 15 115 178 213 214 242 235 218 200 181 164 146 131 115 98 83 74 63 55 51 44 $ 40 283 489 715 911 ■1,011 1,027 912 734 521 307 65 170 933 1,079 1,210 1,325 1,423 1,506 1,580 1,643 1,698 1,749 $1,793 283 715 911 1,011 1,027 912 734 521 307 170 933 1,079 1,210 1,325 1,423 1.506 1,580 1,643 1,698 1,749 1,793 $1,833 * Based on earnings from medium-high-yielding trees. t Taken from Table 2, column 4. J Taken from Table 3, column 2. Now your problem is to decide whether the $141 you are making on your present orchard is worth more or less to you than the $1,833. You can do this by converting the $1,833 into terms which can be compared with the $141. STEP 4— AMORTIZE THE PRESENT VALUE OF THE REPLACEMENT TREES To amortize the present value of the replacement trees after year 26, you will again have to use a table. The Amortization Table (table 5) TABLE 5 Amortization Table* Year Amortization factor using discount rate of 3 per cent 5 per cent 6 per cent 8 per cent 1 2 3 4 t 1.0300 .5228 .3535 .2691 .2184 .1846 .1605 .1425 .1284 .1172 .1081 .1005 .0940 .0885 .0838 .0796 .0760 .0727 .0698 .0672 .0649 .0627 .0608 .0590 .0574 ,0559 .0546 .0533 .0521 .0510 .0500 .0490 1.0500 .5378 .3672 .2820 .2310 .1970 .1728 .1547 .1407 .1295 .1204 .1128 .1065 .1010 .0963 .0923 .0887 .0855 .0827 .0802 .0780 .0760 .0741 .0725 .0710 .0696 "■» .0683 .0671 .0660 .0651 .0641 .0633 1.0600 .5454 .3741 .2886 .2374 .2034 .1791 .1610 .1470 .1359 .1268 .1193 .1130 .1076 .1030 .0990 .0954 .0924 .0896 .0872 .0850 .0830 .0813 .0797 .0782 .0769 .0757 .0746 .0736 .0726 .0718 .0710 1.0800 .5608 .3880 .3019 .2505 .2163 .1921 .1740 .1601 .1490 .1401 .1327 .1265 .1213 .1168 .1130 .1096 .1067 .1041 .1019 .0998 .0980 .0964 .0950 .0937 .0925 .0914 .0905 .0896 .0888 .0881 .0875 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 * Multiply the income from replacement trees (discounted and accumulated) by the appropriate amor- tization factor to get the amortized present value. tells you exactly what you must multiply the $1,833 by in order to amortize it. Since you are using a discount rate of 5 per cent, you look in that column for year 26. To get the amortized present value of the accumulated income (dis- counted) for 26 years, multiply that income by the factor indicated by an arrow in table 5: $1,833 x .0696 = $127.57 This figure, $127.57, is the amortized present value of the net income from the replacement trees. (The accumulated net income has already been discounted in Step 3.) STEP 5— COMPARE THE YEARLY INCOME FROM YOUR PRESENT TREES WITH THE PRESENT VALUE OF REPLACEMENT TREES (DISCOUNTED AND AMORTIZED) Now you are in a position to compare the yearly income from your present orchard — $141 — with the present value (discounted and amor- tized) of the income from the replacement trees — $127.57. Your present trees are still worth more to you than the replacements in year 26. INCOME FOR YEAR 27 Now you try to look ahead to next year's income to determine if the same thing will be true then. You go through the same five steps to get your figures for year 27. STEP 1. Next year (see year 27 for medium-high-yielding trees in table 1) you expect your yield to go down to 13.6 tons per acre. Your gross income will be $816. Your costs will be $689 — leaving a net in- come of $127. STEP 2. You can expect your replacement trees to earn about the same amount in year 27 (that is, $127), since they will be of the same yield level. STEPS 3 and 4. With this figure — $127 — you can go through steps 3 and 4 to get the amortized present value (discounted at 5 per cent) of the replacement trees over the next 27 years. Step 3 — Using the Present Value Table (table 3) on page 7, discount the $127 at 5 per cent to get its present cash value. Note that you now use the discount factor for year 27 or .268. Your calculation will be $127 x .268 = $34. You know that the accumulated discounted value of the replacement trees will be $1,833 at the end of year 26, so you add the $34 to this to get the accumulated discounted value at the end of year 27— $1,833 f $34 = $1,867. Step 4 — Using the Amortization Table (table 5) on page 9, you see that the amortization factor for year 27 is .0683. Multiply $1,867 by »»» 10 .0683 to get $127.52, or the present amortized value of the replacement trees. Actually, the highest present amortized value of the replacement trees was reached in year 26— $127.57. This is the figure you compare with earnings from present trees. STEP 5. Now you can compare the highest present amortized value of the replacement trees — $127.57 — with income from your present 400 300 200 100 100 200 -300 400 -500 /p / A RESE nnual NT Tl net inc REES ome RF Pl AP F »-- ^t »^ B .-- T REES IERE ■ *■ i > y ++* 4 * / / > 4 > i i / Fut RE ure iru PLAC :ome, EMEh discou \T TR ited ar EES id amc rtized J w i i * 1 1 1 1 4 / 1 I II II v ll 22 24 26 27 28 30 2 4 6 8 10 12 14 16 18 20 AGE OF TREES (YEARS) Fig. 1. Income from present trees compared to expected future income from replacement trees (both medium-high-yielding; price of peaches, $60 a ton) 11 stand at the end of year 27 — $127. At the end of year 27 the highest amortized present value of your replacement trees is greater than the value of your present stand. You can see that it would be more profit- able for you to plant your replacement trees at the end of year 26. The rule is this — When the yearly net income on your present trees drops below the highest present value of your replacement trees (discounted — Step 3; and amortized — Step 4), you should replace the present trees. Figure 1 compares the value of present and replacement trees in graph form. It is based on the figures for a single acre of medium-high- yielding trees selling for $60 a ton. The value of the present trees, indi- cated by an unbroken line, is below zero for the first five years, since costs are greater than income. Then it rises sharply for the next six years, when it begins to drop every year. The present value of the replacement trees (discounted and amor- tized), indicated by a broken line, drops sharply at first, then begins to rise sharply until, by year 11, it passes the zero line. In these years the cost of establishing the orchard is still reflected in the value of the replacement trees. The value continues to rise slowly until it begins leveling off. After year 24 it changes by only a fraction of a dollar each year. Finally by the end of year 26, the declining value of the present stand drops below the fairly steady value of the replacement trees. At this point you will replace your present trees. REPLACING PRESENT TREES WITH TREES OF A DIFFERENT YIELD LEVEL The yields from replacement trees may well be different from the vields you obtain from your present trees. Figure 2 shows how the in- come from a present orchard of low-yielding trees would compare with the income from a replacement orchard of medium-high-yielding trees. You will note that the replacement trees reach their highest net income in year 26. If you draw a horizontal line from this point left until it intersects the line for the present stand, you will find the replacement year — in this case year 22. In other words, when the annual net income from your present stand drops below the highest present value of the replacement trees, the trees should be replaced. Consult figures 7 to 10 in the appendix, pages 26-29, for information about: Replacing low-yielding trees with — other low-yielding trees (figure 7a) medium-low-yielding trees (figure 7b) medium-high-yielding trees (figure 7c) high-yielding trees (figure 7d) »»» 12 Replacing medium-low-yielding trees with — low-yielding trees (figure 8a) medium-low-yielding trees (figure 8b) medium-high-yielding trees (figure 8c) high-yielding trees (figure 8d) 400 300 200 PRE :seni fTRE ES(I( >wyie Iding] REPLACE TREES Mign lacem rees ue mt ^HERE \+* »» ■v .-- >■ *** 100 + s s A + < f 1 S\ REPLACEMENT TREES / (medium-high yielding) 4 f Future income, discounted and amortized 1 -100 t 1 $ 1 / i 1 \i 1 200 J k ■ / 1 / / 1 1 t I 300 A \ \ \ i i i f 1 1 -400 500 1 1 1 1 1 1 ll 2 4 6 8 10 12 14 16 18 20 22 23 24 26 28 30 AGE OF TREES (YEARS) Fig. 2. Income from low-yielding present trees compared to expected future income from medium-high-yielding replacement trees (price of peaches, $60 a ton) 13 Replacing medium-high-yielding trees with — low-yielding trees (figure 9a) medium-low-yielding trees (figure 9b) medium-high-yielding trees (figure 9c) high-yielding trees (figure 9d) Replacing high-yielding trees with — low-yielding trees (figure 10a) medium-low-yielding trees (figure 10b) medium-high-yielding trees (figure 10c) high-yielding trees (figure lOd) 500 400 uj300 o < rr cr 200 O Q CO UJ £ ioo (- o -100 -200 PEACHES $60 A TON f 'EACH ESX $55 A TON PRESENT TREES REP .ACE i Annual net income TR :es WHE RE «**•' »•** i •^5 ■■■■ ■-T r^s " ■-■ U* PEACHES V $60 A TON / .-■]-- ... .« _ M ■ • m >* PEACHES RE PLACE / s r $55 A TON T REES / / s r IERE / / / / J • 4 i / fi > // 1 REPLACEMENT TREES fcjf Future income, discounted and amortized i / L\AA- ., I k — 1 _ — J — 1 I 1 1 _ J 10 12 14 16 18 20 22 AGE OF TREES (YEARS) 24 26 28 30 32 Fig. 3. The effect of lowering the price of peaches by $5 a ton — replacement age only slightly later (medium-high-yielding trees) 14 EFFECT OF CHANGES IN PRICE ON REPLACEMENT AGE Changes in price actually have little effect on the replacement age of trees, since, when the income from your present trees goes down, the present value of your replacement trees is also affected. Figure 1 shows the comparison between present medium-high-yielding trees and re- placements of the same yield level when the price is $60 a ton. Figure 3 shows what happens to these two values when the price goes down to $55 a ton. Figure 4 shows what happens to these values when the price goes up to $65 a ton. As you can see, the year when the value of present trees drops below the highest value of replacement trees re- mains about the same — year 26 to 27. The same thing will hold true 500 400 300 200 100 100 -200 PEACt HEsN PE /VCHES $60 A TON k $65 A TON F EPLAi ;e 1/ PRESENT TREES TREE IK Annual net income .ri HERE PEACHES **•' + ~ % • ^ ^T * $65 A TON y / + ~* ■ -- ■ » mm i ,mtm "■■.1 »r ^^ REF LACt < ^■4 1^ / S PEACHES TR EES / y $60 A TON H ;re t < >' tY. ' 4 Wi\ / / REPLACEMENT TREES > Future income, discounted and amortized / if i t #i L\aa ...Ml 8 10 12 14 16 18 20 22 24 26 28 30 32 AGE OF TREES (YEARS) Fig. 4. The effect of raising the price of peaches by $5 a ton — replacement age only slightly earlier (medium-high-yielding trees) 15 for all the yield levels — low, medium-low, medium-high, and high, with one exception. If the price drops below $55 a ton, it would be unprofita- ble to replace any present trees with low-yielding trees, because the accumulated income you can hope to make — discounted and amor- tized — will always remain below zero, regardless of the number of years you keep the replacements. /pF *ESEf> \T TF EES | Annual net income RtPL ACb IRE ^ ** 1 1 s 4 > > u* 1 1 / 4 f REPLACEMENT TREES I 1 Expected future income i i discounted and amortized -200 m w i 1 i > I i 1 i | -300 * w 1 t ' # -400 1 / 1 i 1 1 I ► | 1 1 1 1 . | -bUU if 10 12 14 16 18 20 AGE OF TREES (YEARS) 22 24 26 28 30 Fig. 5. The effect of a $50 per acre increase in fixed costs on replacement age of trees (medium-high-yielding) 16 EFFECT OF CHANGES IN COSTS ON REPLACEMENT AGE Changes in costs also have little effect on replacement age. Again these changes are reflected in both the value of present trees and in the value of replacement trees. Figure 5 shows how a $50 a year increase in fixed costs affects the value of both present medium-high-yielding trees and replacements of the same yield level; figure 6 shows how a 400 300 #PR ESEN" r TRE :es RE PLACI 200 f Anr ual ne t incor ne Tl REES S* ^ + + * .— ■"• — ^ em Ml I 1 ■■** 100 t + J | + 1 4 < / 1 4 4 / f REPLACEMENT TREES 1 1 Future income, discounted and amortized / | -100 / 1 W 1 ( i I i 1 1 i -200 4 / I i - / / / / 1 . f -400 \l I f | V 1 500 | 1 l I li 10 12 14 16 18 20 AGE OF TREES (YEARS) 22 24 26 27 28 30 Fig. 6. Effect of a $50 per acre decrease in fixed costs on replacement age of trees (medium-high-yielding) 17 $50 decrease in fixed costs affects these values. In each case the year when the annual net income from present trees drops below the highest present value of replacement trees (discounted and amortized) remains about the same — year 26 to 27. YIELD FROM OLDER TREES It may be difficult to obtain accurate information on yields from trees past 20 years of age. You may find that, although the sample yields given in table 1 fit your own yields fairly well for the first 20 years, they do not fit so well after that age. Your own yields may vary from 11 tons per acre for low-yielding trees to 18 tons per acre for high- yielding trees. Table 6 gives the income you can expect from various yields after your trees pass 15 years of age, if the price is $60 a ton. Using this table you can adjust your net income for any year. TABLE 6 Annual Net Income for Trees Over 15 Years of Age Price of Peaches $60.00 per Ton: Selected Yields Yield per acre Annual net income per acre tons 11.0 dollars $ 6 11.5 29 12.0. . 53 12.5 76 13.0 99 13.5 123 14.0 146 14.5 169 15.0 192 15.5 . 216 16.0 239 16.5 17.0 262 286 17.5 309 18.0 $332 EFFECT OF CHANGES IN DISCOUNT RATE ON REPLACEMENT DATE In some cases, you may use a different rate of interest to figure the discounted present value of your replacement trees. The income from your present stand may be worth much more to you right now than 18 the future income from replacement trees. In this case, you might dis- count the future income by 8 per cent. You would find that the replace- ment age would be one or two years later. On the other hand, the future income may be more important to you than the income from present trees. In this case, you might discount the future income at only 3 per cent. The replacement age would then be one or two years sooner. For medium-high-yielding trees replaced with trees of the same yield level, this would be year 25 or year 24. APPLICATION TO YOUR OWN ORCHARD To apply this information to your own orchard — STEP 1. Make out the Step 1 Table of earnings on your present trees (similar to table 2 on page 6). Begin at the present age of your trees, for example, year 20. If you want to extend this table beyond the present time you will have to guess what your yield and costs will be in the next few years. If your yields have been dropping by about four tenths of a ton in the past few years, they will probably continue to do so. If your costs have been dropping about $5 yearly, they will probably con- tinue to drop at the same rate. STEP 2. Make out the Step 2 Table of earnings which you expect from replacement trees. This table will be similar to the table you made out for Step 1, except that you will have to adjust the yields if you are replacing your present stand with trees of a different yield level. Also, this table should be filled in for each year. See table 1 on page 4 for typical yields you can ex- pect from four yield levels. STEP 3. Discount the value of future earnings on the replacement trees by filling in Step 3 Table. Column 5 gives you the accumulated discounted value, which you will use in the next table. STEP 4. Amortize the value of future earnings on the replacement trees by filling in Step 4 Table. Column 3 gives you the amortized present value of the future earnings. The highest figure in this column will be used in the next table. STEP 5. Compare the annual net income from present trees (column 5 of Step 1 Table) with the highest amortized present value of the replacement trees (column 3 of Step 4 Table) to find the year when the value of present trees drops below the value of replacement trees. Present trees should be replaced at the end of the previous year. 19 STEP 1 TABLE Income from Present Trees Age of tree Yield per acre X Selling price = Gross income — per ton Operating costs (includ- ing per acre interest on initial loan) Net income per acre after costs = (costs outweigh income in first years) 1 2 3 4 5 Sample At planting. . 1 2 3 4 tons 1.0 5.5 X X X X X dollars dollars .. = - $60 = $ 60 60 = 330 dollars $283 216 250 287 452 dollars = $-283 -216 -250 -227 -122 10 11 19.2 19.4 X X 60 = 1,152 $60 = $1,164 757 $762 395 = $ 402 At planting X = 1 X = = 2 X = = 3 X = = 4 X = = 5 X = = 6 X = = 7 X = = 8 X = = 9 X = = 10 X = = 11 X = = 12 X = = 13 X = = 14 X = = 15 X = = 16 X = = 17 X = = 18 X = = 19 X = = 20 X = = 21 X = = 22 X = = 23 X = = 24 X = = 25 X = = 26 X = = 27 X = = 28 X = = 29 X = = 30 X = = 31 X = = 32 X = = 20 STEP 2 TABLE Future Income from Replacement Trees Year Expected yield Expected Future net in- per acre (see Expected operating costs come per acre Table 1, X selling price = Gross income - (including = after costs (costs page 4, for per ton interest on outweigh income typical yields) initial loan) in first years) 12 3 4 5 At planting OX =0 1 X 2 X 3 X 4 x = - 5 X 6 7 X X = - 8 9 X X 10 X 11 X 12 X 13 X 14 X 15 X 16 X = 17 X 18 X 19 X 20 X 21 22 X X = - 23 X 24 X 25 X 26 X 27 X 28 X = - 29 X 30 X 31 X = 32 X = - 21 STEP 3 TABLE Discounted Present Value of Replacement Trees Year Discount factor Future net income (Choose 3, 5, 6, or per acre 8 per cent factors (Enter figures from Present from column 5 X Value Table on on Step 2 Table page 7 and enter in this column) correct factors in this column) = Discounted value of future income Last year's Accumulated + accumulated = discounted value value of future income per acre 1 2 3 4 5 Sample Planting time 1 2 dollars factor $ -283 X (No calculation at time of planting) -216 X .952 (5 per cent rate) -250 X .907 (5 per cent rate) = dollars $ -283 -206 -226 dollars dollars + $ = $ -283 + -283 = -489 + -489 -715 Planting time X = + 1 X = + 2 X = + 3 X = + 4 X = + 5 X = + 6 X = + 7 X = + 8 X = + 9 X = + 10 X = + 11 X = + 12 X = + 13 X = + 14 X = + 15 X = + 16 X = + 17 X = + 18 X = + 19 X = + 20 X = + 21 X = + 22 X = + 23 X = + 24 X = + 25 X = + 26 X = + 27 X = + 28 X = + 29 X = + 30 X = + 31 X = + 32 X = + 22 STEP 4 TABLE Amortized Present Value of Replacement Trees Year (Do calculations for four or five years close to ex- pected replacement age) Amortization factor Accumulated dis- (Choose 3, 5, 6, or 8 counted value (Enter per cent factors from Amortized present figures from column 5 X Amortization Table on = value of future on Step 3 Table in this page 9, and enter earnings per acre column) correct figure for each year in this column) 1 2 3 Sample 26 dollars factor dollars $1,833 X .0696 $127.57 X X X X X STEP 5 TABLE Comparison of Net Income from Present Trees with Amortized Value of Replacement Trees Year (Compare figures for four or five years close to expected replacement age) Sample 24 25 26 27 Net income from present trees per acre (Enter figures from column 5 of Step 1 Table in this column) dollars $164 150 141 $127 t" Amortized present value of replacement trees per acre (Enter figures from column 3 of Step 4 Table in this column) dollars $127 127.25 127.57- $127.52 /Highest future value of replace- ment trees is greater than (Net income from present trees \ in year 27. Replace the trees at (the end of year 26. 23 500 400 300 200 LU 100 O < TREES (DOLLARS PER 8 ^ O —200 cr u_ UJ O ^-300 -400 — 500 10 12 14 16 18 20 AGE OF TREES (YEARS) 22 24 26 28 30 You may find it helpful to make a graph similar to figure 1 so that you can see in exactly what year the income from the present trees drops below the highest present value of the replacements. Let us assume that you now have low-yielding trees and you intend to replace them with medium-high-yielding trees. Your present trees are 20 years of age — but on the basis of data from the past few years, »»» 24 you assume what the yield and costs will be for the next several years. In this way, you make out a table of earnings for the first 27 years. You use table 1 on page 4 to determine what your yields for the medium-high-yielding replacement trees will be. You assume that your costs will be about the same for establishing the replacement trees as they were for establishing the present orchard. If costs go up, prices undoubtedly will also, so that the ratio will likely remain about the same. On the basis of this you can make out a table of earnings for the next 27 years for the replacements. The graph you might finally construct would look something like figure 2. The highest value of the replacement trees would not be reached until you made the calculations and filled in the graph for year 26. But, by drawing a horizontal line left, you could see that the value of the present trees dropped below this figure in year 22. In other words, you would replace your trees after year 22. Regardless of the changing yields, selling prices, and costs, you al- ways compare: Present Trees Replacement Trees Annual net income per acre Highest present value of fu- ture income, discounted and amortized When this is higher, keep When this is higher, replace the present trees. the present trees. 25 APPIUM Fig. 7. When to replace LOW-YIELDING trees 100 „#»' »-- ■ ■i / S i A .PLA( UTEf GE2 4 J / 4 A i\ i 1 » 4 8 12 16 20 24 AGE OF TREES (YEARS) 7a. If replaced with LOW-YIELDING trees CC -100 - S+ REPLACE \ / AG 126 1 t — #1 * : 4 8 12 16 20 24 28 AGE OF TREES (YEARS) 7b. If replaced with MEDIUM-LOW-YIELDING trees 100 *+* »^B ... .. / I'' R / :pla< ^FTEF > 1 1 / / f 1 / t # I f 4 8 12 16 20 24 28 AGE OF TREES (YEARS) 7c. If replaced with MEDIUM-HIGH-YIELDING trees 100 200 o O -300 z *« .*"» far* / *REF LACI / AS Si POS )ON SIBL ^S { # 1 # ft n ' i * 4 8 12 16 20 24 AGE OF TREES (YEARS) 7d. If replaced with HIGH-YIELDING trees Key: Present low-yielding trees, annual net income —> Replacement trees, expected future income (discounted and amortized) 26 Fig. 8. When to replace MEDIUM-LOW-YIELDING trees 300 200 100 -100 200 300 / Yll * REPl IDS ACE DECR /VHEr EASE 1 11 .5 TO _l i I i 4 8 12 16 20 24 AGE OF TREES (YEARS) 8a. If replaced with LOW-YIELDING trees 28 32 O < 85 20 ° CL ce < 100 ■100 - 300 y REPIACE AFIFR / t + AGE 31 4 i i 1 i w 1 I r 28 32 4 8 12 16 20 24 AGE OF TREES (YEARS) 8b. If replaced with MEDIUM-LOW-YIELDING trees 300 200 100 100 200 -300 -^ *« ^* / t ►^ R EPLA AFTE ^GF ? CE^ R 6 f 1 J i i r f # 1 1 1 I 1 t 4 8 12 16 20 24 28 AGE OF TREES (YEARS) 8c. If replaced with MEDIUM-HIGH-YIELDING trees -200 300 .+ / REPL \CE / AFTI "R t AGE 18 I / 1 i 1 # #15 i 4 8 12 16 20 24 28 AGE OF TREES (YEARS) 8d. If replaced with HIGH-YIELDING trees Key: Present medium-low-yielding trees, annual net income ^^m Replacement trees, expected future income (discounted and amortized) 27 Fig. 9. When to replace MEDIUM-HIGH-YIELDING trees ^-200 8 --300 ^** **' ■ HI / RFPI APF WHF 1 / YIE 11 LDS 5TC DECF NSP EASI ERA TO :re i r r 4 8 12 16 20 24 28 AGE OF TREES (YEARS) 9a. If replaced with LOW-YIELDING trees rr C) < cc 300 hi LL CO ir ?no < i _j 8 100 CO -100 /■' **•'**"* PL A :e AFTER f / AGE 31 1/ ft/ # 1 4 8 12 16 20 24 28 AGE OF TREES (YEARS) 9b. If replaced with MEDIUM-LOW-YIELDING trees 100 f+* !*■ II / \s i 1 / 1 / a/ 1 1 * -200 : -300l EPU AFT( t#n rai ia / U kCE^ R If AGE 19 / 4 I # I I 1 f /I Z 1 # 4 8 12 16 20 24 AGE OF TREES (YEARS) 4 8 12 16 20 24 28 AGE OF TREES (YEARS) If replaced with MEDIUM-HIGH-YIELDING trees If replaced with HIGH-YIELDING trees Key: Present medium-high-yielding trees, annual net income *^mm Replacement trees, expected future income (discounted and amortized) 28 Fig. 10. When to replace HIGH-YIELDING trees 500 400 100 m « s YIEL EPLA DS D :e w :cre HEN ASE 11.5 TON 5 PE R AC 300 1 j i 4 8 12 16 20 24 2 AGE OF TREES (YEARS) 10a. If replaced with LOW-YIELDING trees b00 400 200 100 -100 -200 s A / > REPLACL WitI NELDS DECREASE 12.5 TON!5 PFF ACF'F y -300 - t r 4 8 12 16 20 24 28 AGE OF TREES (YEARS) 10b. If replaced with MEDIUM-LOW-YIELDING trees 500 400 300 -300 •*• i0* *«i mm 4 Rl PIA( :fw HFN / i / YIELI 13.5 )S DI TON CRE \ PEf ASE" ? ACI / 1 Jl r a: O < 400 UJ Gl- 300 en cc < 200 4 8 12 16 20 24 AGE OF TREES (YEARS) ■200 -300 ^^ »•*' --^ j ,'' R EPLA AFTE GF ' i r # # # # 4 8 12 16 20 24 AGE OF TREES (YEARS) If replaced with MEDIUM-HIGH-YIELDING trees If replaced with HIGH-YIELDING trees Key: Present high-yielding trees, annual net income "^ Replacement trees, expected future income (discounted and amortized) 29 ««« 10m-5,'62(C7277)A.M. SignpOSt TO BETTER FARMING YOUR UNIVERSITY OF CALIFORNIA FARM ADVISOR . . . publications, information on local conditions, data on the latest developments in agricultural research by scientists of the University. Hell answer your questions, help you in any way he can with your farm problems. There is no charge for this service. Why not try it?