International Journal of Project Management 18 (2000) 349360

www.elsevier.com/locate/ijproman

Risk management of an agricultural investment in a developing

country utilising the CASPAR programme
Tony Merna*, Detlef Von Storch
Department of Civil and Structural Engineering, Centre for Research in the Management of Projects, UMIST, P.O. Box 88,
Manchester M60 1QD, UK
Received 17 February 1999; received in revised form 7 July 1999; accepted 14 July 1999

Abstract
This paper describes how the software programme Computer Aided Simulation for Project Appraisal and Review (CASPAR)
can be used to determine the commercial viability of an agricultural investment. A case study involving the purchase of a farm
and subsequent crop production of tobacco and paprika over a ten-year operation period in a developing country is presented.
Initially a base estimate is prepared and a risk analysis performed. Risks are then mitigated and the risk analysis is performed
again. The results of the risk analysis can then be used as part of the business plan. 7 2000 Elsevier Science Ltd and IPMA. All
rights reserved.
Keywords: Risk management; CASPAR; Investment appraisal; Crop cycle; Risk mitigation

1. Introduction
In this paper risk management techniques are applied
to a hypothetical farm investment in a developing
country. As project management concentrates on a project, rstly the authors consider the term project.
``A project is an undertaking that has a beginning and
an end and is carried out to meet established goals
within cost, schedule and quality objectives'' [1].
In the hypothetical case study the appraisal period is
11 yr, the end of the appraisal period can be dened
as the end of the undertakings life span. Economic
parameters such as the internal rate of return (IRR),
net present value (NPV) and cash pay back time
(CPBT) are calculated.
Not only the investment in a farm and its manage* Corresponding author. Tel.: +44-161-200-4590; fax: +44-161200-8969.
E-mail address: pwmorris@netcomuk.co.uk (T. Merna).

ment is a project, but also each production cycle of a

crop. In this case study the production of tobacco and
paprika can be dened as a project on its own, as well
as the construction of infrastructure such as housing
for farm workers, clinic, school, tobacco barns and the
installation of an irrigation system. Also, the installation of a computer system and the subsequent training
of sta can be dened as a project. Therefore, the
investment in a farm and its management can also be
dened as a set of related projects, that is, a `programme of projects'.
The resources used to carry out projects are people,
money, equipment and time. The project parameters
time, cost and performance (quality) are specied in
the planning phase of the project and form the base
for control during the implementation phase.
2. The CASPAR programme
The CASPAR software programme, developed in
the Centre for Research in the Management of Projects, at the University of Manchester Institute of

0263-7863/00/$20.00 7 2000 Elsevier Science Ltd and IPMA. All rights reserved.
PII: S 0 2 6 3 - 7 8 6 3 ( 9 9 ) 0 0 0 5 0 - 2

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T. Merna, D. Von Storch / International Journal of Project Management 18 (2000) 349360

Science and Technology (UMIST), can be used to create investment models for all types of projects [2].
CASPAR is normally used to appraise construction
projects such as the Mersey barrage, the Severn tidal
power scheme, industrial plants, toll roads, bridges
and privately nanced prisons. The CASPAR programme is intended for use at the appraisal stage of
the project cycle where project denition is low and
time scale is long.
CASPAR utilises a project network incorporating
the Monte Carlo simulation method of analysis. This
computer software facilitates the preparation of sensitivity analysis plots of cumulative frequency distributions for time and cost. This programme also
enables the user to make small changes to the model
without signicant calculation of the data.
The programme can be used for three main purposes:
. to predict the outcome of the project at appraisal
stage;
. to aid the project manager in controlling the project
throughout its development phase; and
. to monitor the operation phase in connection with
any changes that may occur aecting the forecasts
of nancial results.
The software simulates the interaction between time,
resources, cost and revenue over the entire project life.
A network of interlinking activities each allocated a
cost centre is created in a data le. The resources are
either quantity or cost based and project related.
The computer generates the cash ow from which
nancial parameters, such as the IRR, NPV, payback
period, discounted payback period, net cash balance,
maximum cash lock up, maximum discounted cash
lock up, maximum investment, net return, discounted
net return are obtained.
The software can also simulate the eects of risks
and produce sensitivity analysis of individual risks or
combine the eects of project risk in a probabilistic
analysis utilising a Monte Carlo simulation technique.

3. Sensitivity analysis
Sensitivity analysis is performed by changing the
values of independent risk variables to predict the
economic criteria of the project. A sensitivity diagram can be produced from the results obtained
from the CASPAR programme, which identies the
most sensitive risk variables and the relative importance of each variable. The range of percentage
changes in each variable reect the uncertainty associated with each variable.
The main limitation of the sensitivity analysis is
that no indication of the likely probability of occur-

rence of changes in key variables is given. Another

shortcoming is the fact that each variable is considered independently. In reality the management
normally wants to know the result of the combined
eect of changes of two or more variables because
some combination of the variables considered independently during a sensitivity analysis will occur.
The above mentioned limitations are overcome by
probability analysis which can specify a probability
(frequency) distribution for each risk and for the project. It can also consider situations where a number of
variables can be varied at the same time.
4. Probability analysis
For a probability analysis in the CASPAR programme, dierent values of risk variables are combined in a Monte Carlo simulation. The frequency
of occurrence of a particular value of any one of
the variables is determined by dening the probability distribution to be applied across the given
range of values. The results are shown as frequency
and cumulative frequency diagrams. The allocation
of probabilities of occurrence to each risk requires
the denition of ranges for each risk [3]. The denition of these ranges is normally subjective (especially if no historical data is available) and
therefore project members who are responsible for
the original estimates should be involved in this
exercise.
The steps of a probability analysis in the CASPAR
programme are:
(a) assess the ranges for the variables being considered and determine the probability distribution
most suited to each variable;
(b) select values for the risk variables by the Monte
Carlo method;
(c) run a deterministic analysis using the combinations of values selected;
(d) repeat steps (b) and (c) a number of times; the
resulting collection of outcomes is then arranged in
sorted order to form a probability distribution of
the result. The accuracy of the nal distribution
depends on the number of repetitions, or iterations,
usually 200 iterations provides sucient accuracy.

5. The basic model

The appraisal period for the case study spans 11 yr.
The rst year is the period designated phase 1. During
this year the prepurchase preparation is done. Tasks
such as the prefeasibility study, discussions with
experts, nancial institutions and local authorities,

T. Merna, D. Von Storch / International Journal of Project Management 18 (2000) 349360

negotiations with farm owners and local investment

organisations, purchase of farm, incorporation of the
new company and application for work and residence
permits have to be performed in this phase. Activities
during this phase are called `construction activities' in
CASPAR, as CASPAR has been developed primarily
for the appraisal of construction projects.
The production stage, which spans 10 yr, starts after
phase 1 in the 2nd yr and designated phase 211, with
each production phase equalling 1 yr.
As the case study deals with an agricultural project
the production tasks are the same every year as agricultural projects typically follow the same cycle each
year unlike construction projects where tasks in the
sequence are normally project denition, project conception, project design, construction, commission and
operation.
The agricultural production cycle is inuenced by
the weather periods those being the dry season
from May to October and the wet season from
November to April. Therefore, the production stage
must be divided into 10 time periods corresponding to
the nancial years. Activities in this stage are to be
called `operating activities' in CASPAR.
For purpose of modelling with CASPAR the dened
activities (elements of a project) are not tasks but
other elements of the project. In phase 1 these activities are fees and expenses (US$ 270 000) and initial
investment for purchase of the farm (rule of thumb in
some developing countries is: value of farm=estimated
turnover of last year, in this case US$ 3 500 000). In
the production stage 1 yr has eight activities: tobacco
direct costs, paprika direct costs, interest payments,
indirect costs of tobacco and paprika production,
tobacco revenue, paprika revenue, loan receipts and
earned interest.
Exceptions are in phase 2 and phase 711, as the
production of paprika only starts in the second production year (phase 3), phase 2 has only six activities
(no paprika direct costs and no paprika revenue). Furthermore, from phase 7 to 11 there are no loan
receipts these phases consist of only seven activities
each. Therefore, the number of activities from phase 1
to 11 is 75.
Investment in infrastructure and machinery and
equipment over a period of 10 yr is also included. The
highest investment is planned for yr 2 and 3 for building a storage extension for the storage of tobacco and
paprika, the installation of an irrigation scheme, building tobacco barns and grading shed, construction of
houses for farm employees and school extension for
farm workers children, the drilling of a borehole and
the installation of a transformer house.
Debt service for the investments are planned to be
nanced by loans until yr 5. From yr 6 onwards the
investments are planned to be nanced by the accumu-

351

Table 1
Basic model economics outputs
IRR
(%)

NPV
(US$)

NCB
(US$)

MCLU
(US$)

CPBT
(yr)

DCPBT
(yr)

18.87

637 000

5 657 000

3 770 000

5.92

9.07

lated positive net cash ow from revenues generated

by tobacco and paprika sales.
The discount rate is set at 15% (the opportunity
cost of capital in the host country in October 1997,
equivalent to the rate of interest for deposits on a call
account). A summary of the CASPAR economic outputs is shown in Table 1.
The calculated IRR is 18.87%, the NPV amounts to
US$ 637 000. The net cash balance (NCB) is US$
5 657 000. The widely used interpretation of net cash
ow means cash inows minus cash outows plus/
minus interest earned/paid. The maximum cash lock
up (MCLU) is US$ 3 770 000 which is the amount
spent in phase 1.
The cash pay back time (CPBT) is the length of
time required to recoup the money invested in a capital project. The time the project requires to pay back
the initial investment for purchasing the farm and the
planned investments in machinery, equipment and infrastructure and other costs like fees and expenses
incurred in phase 1 and running costs of the production phases is 5.92 yr and discounted cash pay
back time (DCPBT) is 9.07 yr.
Fig. 1 illustrates the cumulative cash ow and discounted cumulative cash ow over the project lifecycle.
This initial analysis shows that the project is commercially viable as the IRR is relatively high, the NPV
is positive, the Net Cash Balance is very high and the
Cash Payback Time is relatively short.
The next step is the risk analysis consisting of the
sensitivity analysis and probability analysis, which
quanties the eects of the major risks identied on
the economic parameters.
6. Sensitivity analysis
The 11 risks identied below are typical risks in the
principal areas of agricultural projects, which are sensitive to change. Risks like tobacco curing management
and destruction of tobacco by hail are specic to
tobacco production [4].
There are 11 identied risks:
.
.
.
.
.

tobacco production management;

tobacco curing management;
destruction of tobacco by hail;
weather;
tobacco output;

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T. Merna, D. Von Storch / International Journal of Project Management 18 (2000) 349360

Fig. 1. Cumulative cash ow diagram.

. paprika output;
. interest rate;
. demand/supply situation on tobacco world market
(inuencing the price for tobacco and thus the
tobacco revenue);
. demand/supply situation on paprika world market;
. direct costs of tobacco production;
. direct costs of paprika production.
Changes in independent variables (risks) such as the
quality of tobacco curing management, the possible
destruction of the tobacco crop by hail, the weather and
the demand/supply situation on the tobacco world market and tobacco output have the most signicant eect
on the investment.

7. Probability analysis
The results of the probability analysis are shown in
Figs. 2 and 3 for the economic parameters of IRR and
NPV, respectively.

7.1. IRR
The cumulative probability distribution diagram in
Fig. 2 shows that there is a 15.5% likelihood that the
IRR would be less than 40% and a likelihood of
88.5% that the IRR will not exceed 20%.
Compared with the original prediction of an IRR of
18.87%, the results of the probability analysis for the
IRR show a likelihood of a much lower IRR, which
has its mean value at 15.36% (which should replace
the original prediction of 18.87%).
Therefore, the project appears to be very risky based
on the ranges used in the analysis.
7.2. NPV
The cumulative probability distribution diagram in
Fig. 3 shows that there is a likelihood of 18.9% that
the NPV is worse than US$ 4 670 000 and a 84.7%
likelihood that the NPV will not exceed US$ 1 330 000.
The mean value of US$ 925 000 should replace the
original prediction of US$ 637 000.

T. Merna, D. Von Storch / International Journal of Project Management 18 (2000) 349360

Fig. 2. Cumulative probability distribution diagram (IRR).

Fig. 3. Cumulative probability diagram (IPV).

353

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T. Merna, D. Von Storch / International Journal of Project Management 18 (2000) 349360

The results of the probability analysis using the

NPV as an economic parameter conrm the results of
the probability analysis for the economic parameter
IRR, indicating that the project seems to be very risky.

8. Risk mitigation
Mitigation of the identied risks is now carried out.
A result of this risk mitigation exercise will be that the
ranges of the variables whose risks were mitigated will
be reduced. Then new results will be calculated and
depicted in new diagrams after sensitivity and probability analyses.
Risk mitigation can be done for all the identied
risks:
. The negative risk of tobacco production management
can be reduced by an extremely thorough search
and recruitment drive for a competent and reliable
farm manager. The recruited farm manager must
make sure that project management tools like quality management, risk management, human resource
management, nance and production management
are used and proper planning and implementation
of plans and monitoring takes place.
. The identication of tobacco curing management as a
signicant risk requires that special emphasis is
made on this activity. The potential of the tobacco
leaf which it possessed at the time of reaping cannot
be improved by curing. Curing alters the leaf into a
dierent state by yellowing (colouring) and drying.
Bad curing can spoil a potentially good leaf. Therefore only negative risks are allocated to curing management. The negative range can be reduced by risk
mitigation measures, good quality management with
a detailed quality plan and work instructions will
help. The farm manager must train and closely
supervise the people who are working in the curing
section. The manager should gather as much knowledge about tobacco curing as possible by consulting
experts in tobacco curing.
. The only risk which can be totally mitigated is the
(negative) risk of destruction of tobacco by hail. The
tobacco farmer can transfer this risk by buying a
hail insurance. Typical premiums for hail insurance
is approximately 2.5% of the total cost of production. The compensation covers the damage of
the crop by hail and, together with the farmers salvage operations, should retrieve the cost of production for the next growing season. The premium
for the tobacco hail insurance is already included in
the cost of production calculation.
. The negative risks of weather can be reduced by the
construction of an irrigation system to mitigate the
impact of droughts. In the case of heavy rains risk

mitigation measures to facilitate and control the

rain and runo of water are provided by contours,
the maintenance of healthy soil (in order to guarantee a high inltration rate, to resist harmful rain
splash and runo and to produce crops which grow
well and thus protect the soil quickly) and the building of earth dams and thus reduce the negative risks
of weather.
The costs of these mitigation measures are included
in the cost of production. The costs for the new irrigation scheme is planned to cost US$ 1 200 000 over 4 yr
of installation (production yr 25). The main reason
for installing an irrigation system is the addition of a
second crop which is planted earlier. The supplementary irrigation of tobacco in dry years should be done
with equipment which is normally used for the early
crop. Investment in irrigation only for the purpose of
(eventual) supplementary irrigation in drought years is
not protable whereas the addition of a second (early)
crop is the major advantage of irrigation. Therefore,
the use of an irrigation system for drought impact
mitigation is a welcome side eect of the investment in
an irrigation system which will be primarily installed
in order to grow a second crop.
The negative and positive ranges of the variables
tobacco output and paprika output will be equally
reduced by a more conservative approach concerning
the planned output. The farmer does not want to
expand too quickly and risk that the production management gets out of hand (which then would have the
consequence of not only lower crop quality but also
lower crop output).
. For the risk of change in interest rates both negative
and positive ranges will be equally reduced by negotiating loans and deposits with xed rates of interest.
Loans with xed rates of interest are preferable as
the interest to be paid is known and therefore the
risk of higher interest payments caused by rising
interest rates is avoided. Loans which cannot be
negotiated with xed interest rates will be arranged
with nancial institutions in foreign countries which
are less volatile to changes in interest rates. The
debt service could be paid from a foreign exchange
account [5].
A limit on the upward movement of the interest rate
(cap) and a minimum rate of interest (oor) must be
set if loans with variable (oating) interest rates are
negotiated. The collar [upper and lower limits of an
FRN (FRN=oating rate note, which is a note paying
interest on a oating rate basis)] should be narrow (i.e.
the dierence between cap and oor should be small)
in order to reduce the risk of high interest payments
caused by rising interest rates. The cost of setting a
cap or a oor normally is between 0.25 and 1% [5].

T. Merna, D. Von Storch / International Journal of Project Management 18 (2000) 349360

. The advance selling of (part) of the crop on a contract basis reduces the negative and positive risks of
the change in prices of tobacco and paprika (provoked by a change in the demand/supply situation on
the tobacco and paprika world markets ).
. The negative range of the variable direct costs of
tobacco and paprika production can be reduced by
purchasing machinery, equipment and inputs
together with other farmers in order to get discounts, by developing supply options in other
countries and by keeping foreign exchange accounts
in the host country and in a hard currency country,
where this is allowed. Information on upcoming
changes of the labour rates (which are often set by
government) must be gathered and included in the
budget calculations.
Practices of government interference like the prohibition of the export of capital have been abolished
after pressures on the government of many developing
countries from the International Monetary Fund
(IMF) and the World Bank to liberalise developing
country economies. The reintroduction of such
measures would cause the IMF and World Bank to
stop loan payments and therefore would threaten the
stability of the host country government which needs
loans from these institutions in order to stabilise the
economy [6].

355

In the case of reintroduction of the prohibition of

export of capital by the government one could make
use of transfer pricing. Transfer pricing is the adjustment of prices on sales of material between members
of a multi-company group so as to distribute nancial
burdens between the members in accordance with central nancial policy. The term `transfer pricing' is common in reference to multinational companies, where
transfer pricing is suspected as a method evading
national taxation and custom duties [7].
Transfer pricing seems to be an appropriate method
to deal with the prohibition of export of capital as it
would not be done to evade national taxation and custom duties but to export capital. A company operating
in a hard currency country should be founded which is
ocially independent of the company owning the farm
based in the host country. This new company imports
crops and exports machinery, equipment and inputs to
the farm company in the host country. These exports
would be invoiced at a price which is higher than the
market price. The dierence between this price and the
market price is the prot for this `daughter company'
(owned by the farm owners) which equals the exported
capital.
Another option is that part of the tobacco and/or
paprika crop is sold on a contract basis to this company in the hard currency country (which is also a risk
mitigation measure against price changes of these

Fig. 4. Sensitivity analysis after risk mitigation measures.

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T. Merna, D. Von Storch / International Journal of Project Management 18 (2000) 349360

Fig. 5. Sensitivity analysis (after risk mitigation measures) NPV.

Fig. 6. Cumulative probability distribution diagram (after risk mitigation measures) IRR.

T. Merna, D. Von Storch / International Journal of Project Management 18 (2000) 349360

crops). The `daughter company' pays less than the

market value for the imported crop to the farm. The
dierence between the market value of the crop and
the price paid is the prot for this company (supposed
it sells the crop for a market price) which equals the
capital exported through this operation.
9. Reappraisal after risk mitigation
The new results after risk mitigation are depicted in
Figs. 4 and 5. The diagrams for the sensitivity analysis
Figs. 6 and 7 show a very signicant reduction of the
ranges for the chosen variables as there is more condence in the limits of ranges after risk mitigation.
The most signicant risks inuencing the commercial
viability of the project are still the quality of tobacco
curing management, weather and the demand/supply
situation on the tobacco world market and tobacco output. As the risk of destruction of tobacco by hail was
totally mitigated it is not shown in the sensitivity
analysis diagram.
The results of probability analysis after risk mitiga-

357

tion are shown in Figs. 6 and 7 for the economic parameters IRR and NPV.
9.1. IRR
The cumulative probability distribution in Fig. 6
shows that there is a likelihood of 15.7% that the IRR
is less than 8% and a likelihood of 92.4% that the
IRR will not exceed 33%.
The mean value of the IRR of 23.20% compares
with 18.87% of the original prediction and with the
mean value of 15.36% of the probability analysis
before risk mitigation (and should replace this value).
After risk mitigation the project appears to be very
promising as it shows a better value for the IRR than
the value of the original prediction.
9.2. NPV
The cumulative probability distribution in Fig. 7
shows that there is a likelihood of 17.9% that the
NPV is worse than US$ 635 000 and a likelihood of
86.9% that the NPV will not exceed US$ 3 365 000.

Fig. 7. Cumulative probability distribution diagram (after risk mitigation).

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T. Merna, D. Von Storch / International Journal of Project Management 18 (2000) 349360

Table 2
Original prediction and mean value of probability analysis (IRR and NPV)

Original prediction
Mean value of probability analysis before risk mitigation
Mean value of probability analysis after risk mitigation

The mean value of US$ 1 592 000 compares with

US$ 637 000 of the original prediction and with the
mean value of US$ 925 000 of the probability
analysis before risk mitigation and should replace
this value.
The fact that the values of IRR and NPV after risk
mitigation are not only better than the values resulting
from the probability analyses of IRR and NPV before
risk mitigation, but also are better than the original
predictions (shown in Table 2), conrms the importance of risk management.
The identication and analysis of risks means that
the project manager has to consider the most important risks in the project and to analyse their eect on
the economic parameters. As risk analysis as part of
risk management helps the project manager to anticipate and thus control future events (with risk mitigation), the manager is not taken by surprise by the
occurrence of already identied risks.
It must be emphasised that realistic original predictions (i.e. realistic assumptions) are an absolutely vital
prerequisite for risk analysis. If the risk analysis is
based on unrealistic base data the results of risk analysis are not only unrealistic economic parameters but
the risk analysis also misleads the investor and the
project management by giving the (unrealistic) base
data a sort of scientic approval.
After identication and analysis of risks the next
logical step is to nd ways to mitigate the identied

IRR (%)

NPV (US$)

+18.87
15.36
+23.20

+637 000
925 000
+1 592 000

and analysed risks. Risk mitigation before risks occur

helps to take the necessary precautions against negative risks and thus can considerably improve the protability of the project assessed by its economic
parameters [8].
CASPAR as a project management tool helps the
project manager in the appraisal and reappraisal stage
to set realistic targets and gives a `feeling' for the
negative risks and positive risks (opportunities) of the
project.
10. Key nancial indicators
Key nancial indicators for the appraisal period (11
yr) of a hypothetical project are based on cost of production Figures prepared by the host country tobacco
association for ue-cured tobacco (average Figures for
a farm with 40 ha tobacco production) (Table 3).
An IRR of 23.20% is considerably higher than the
current opportunity cost of capital (15% interest for
call account deposits in the host country in October
1997, 7% for call account deposits in the UK in October 1997) and compares well to the average annual
yield earned in the UK in 1997. Agriculture in the UK
earned an average yield in 1997 of 4%, gilts earned
8%, equities earned 4%, industrial investments earned
8%, investment in oces earned 7% and retail investments earned an average of 7%. The improvement of

Table 3
Key nancial indicators (after risk mitigation)
IRR (original prediction) (%)
Mean value of IRR of probability analysis (after risk mitigation measures) (%)
NPV (original prediction) (US$)
Mean value of NPV of probability analysis (after risk mitigation measures) (US$)
Cash pay back time (yr)
Discounted cash pay back time (yr)
Net cash balance (accumulated net cash ow after yr 11 of appraisal period) (US$)
Maximum cash lock up (US$)
Equity invested (US$)
Maximum borrowing (in yr 6 of appraisal period) (US$)
Bank loan for investments in yr 11 of project appraisal period (US$)

18.87
23.20
637 000
1 592 000
5.92
9.07
5 657 000
3 770 000
3 500 000
5 783 000
3 424 750

T. Merna, D. Von Storch / International Journal of Project Management 18 (2000) 349360

the value of the IRR of the probability analysis after

risk mitigation of 23.20% compared to the IRR of the
original prediction (18.87%) conrms the importance
of the identication, analysis and mitigation of risks as
part of risk management. Risk mitigation before risks
occur helps to identify the necessary precautions
against negative risks and thus can considerably
improve the protability of the project.
A sensitivity analysis shows that the most signicant
risks inuencing the commercial viability of the project
are tobacco curing management, the weather and the
supply/demand situation on the tobacco world market
(which inuences the price for the tobacco leaf)
even after risk mitigation measures. The recruitment
and monitoring of an experienced farm manager, mitigation measures to reduce the negative risks of weather
for crop production and measures to reduce the negative risks of decreasing prices for the tobacco leaf
therefore must have a very high priority.
The NPV, calculated with a discount rate of 15%, is
greater than zero. Therefore, the project can be
accepted according to the criterion for an investment
decision, which demands that the NPV should be
equal or greater than zero. The cash pay back time
(5.92 yr) and the discounted cash pay back time (9.07
yr) show that the time required to recoup the money
invested in the project is relatively short and well
within the appraisal period of 11 yr.
The equity needed for the investment in the purchase of a farm in most developing countries is relatively low as the price for farmland compares
favourably with average prices for farmland in
countries in Europe and North America.
The net cash ow is positive every year from yr 2
onwards (production yr 1), the maximum cash lock up
is not higher then the negative net cash ow in yr 1.
Year 1 equals the prefarm purchase period phase 1:
costs for investment in the purchase of the farm, fees
and expenses are incurred in this period. Revenues are
predicted only from the rst production year onwards.
Liquidity should not be a problem if the project performance comes up to expectations.
The maximum borrowing is reached after yr 6 of the
appraisal period which approximately equals the cash
pay back time (5.92 yr). If necessary the maximum
borrowing could be reduced as the project is predicted
to have recouped the money invested until that time
and to reach a positive net cash ow after yr 6 of the
appraisal period.

11. Conclusions
Risk management can be applied to any investment
project. Projected cash inows and outows form the

359

basis of a project's economics. The commercial viability of a project can be assessed initially on the basis of
those economics. Once a base model has been developed the eects of risks on any activity can be simulated. The ranges used in this simulation will be based
on experience and past data or in some cases be subjective. The results of risk analysis, both sensitivity and
probability can identify the quantitative eect on a
projects economics should such risks occur. Mitigation
of some commercial risks identied in these analyses
can be reduced by laying o risks through insurance
cover, hedging currencies and selling produce on a
contract led basis.
Although the CASPAR programme was initially
developed to appraise construction projects having
both a construction and operation (revenue generation) period the programme can be used to appraise
any type of investment where costs and revenues can
be allocated to a network of activities.
The risk analysis and subsequent risk mitigation
provides information to potential lenders or equity
providers to the project and forms part of the business
plan. Promoters of projects providing this type of risk
analysis are far more likely to receive a positive response from lenders than those Promoters oering
only a projects economics.
In the case study presented the analysis of the ranges
and distributions chosen indicated an optimistic outcome regarding the projects commercial viability.
The two crops of tobacco and paprika were considered in the case study, however, the same risk management framework and CASPAR programme can be
used to analyse the risks for any type of agricultural
investment and form the basis for a risk mitigation
exercise.

References
[1] Haynes ME. Project management: from idea to implementation.
London: Kogan Page, 1990.
[2] Guide to CASPAR: version 3.10. Project Management Group,
Department of Civil and Structural Engineering, UMIST,
Manchester, 1989.
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T. Merna, D. Von Storch / International Journal of Project Management 18 (2000) 349360

Tony Merna is a part time lecturer in the Centre for Research in the
Management of Projects, UMIST and senior partner of Oriel Group
Practice. After graduating he was involved in the planning, construction and supervision of major highways and infrastructure projects
in southern and central Africa. From 1979 to 1988 he was a project
manager on a number of major infrastructure and process facilities
in the Middle East and south-east Asia. During the last 11 years he
has been involved in advising both UK and international organisations on methods of implementing and nancing turnkey/concession/franchise/BOOT contracts for process, water, transportation
and infrastructure facilities.

Detlef Von Storch is a graduate of UMIST with extensive experience

of agricultural projects in southern Africa. After graduating with a
degree in Business Administration from the European Business
School, Frankfurt, in 1993 he was employed by a vocational training
institute in Hamburg. From 1993 to 1996 he was employed as project co-ordinator by the German Development Service to build and
operate a training centre in Botswana. From 1996 to 1998 he carried
out a research project in the Centre for Research in the Management
of Projects at UMIST, investigating crop production in southern
Africa. Detlef Von Storch is currently managing an agricultural project in Zimbabwe.