technological change and marine fisheries development

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Though the aggregate effects of tech- nical progress in marine fisheries are often ambiguous and contradictory, the benefits of innovation which accrue to the individual fisherman may be sub- stantial. The conditions under which it pays to innovate are examined and the factors affecting t~hnoi~i~i diffu- sion are discussed. It is argued that policy needs to be able to anticipate the progress of technology in fisheries and that a flexible regulatory framework is essential if technological change is to be accommodated. David Whitmarsh is Senior Lecturer in Economics and Head of the Marine Re- sources Research Unit,School of Econo- mics, Portsmouth Polytechnic, Locksway Rd, Portsmouth PO4 8JF, UK. I am indebted to my colleagues in the Marine Resources Research Unit for their comments on an earlier version of this paper, and I would particularly like to thank Alan Radford for his advice on the analysis of replacement investment. The usual dis- claimer applies. ‘See. for example, R. Andersen and C. Wadel, eds, North Atlantic Fishermen: Anthropological Essays in Modern Fishing, Memorial University of Newfoundland, Newfoundland, 1972; and J.R. Maiolo and M.K. Orbach, eds, Modernisation and Marine Fisheries Policy, Ann Arbor Scien- ce Publishers, Ann Arbor, MI, 1982. Technological change and marine fisheries development David Whitmarsh modernization of fishing vessels and the use of more efficient capture methods are regarded by many as the ‘active ingredients’ of fisheries development and a potential source of benefit for fishermen and society. Others are inclined to see technological change in a less favourable light, being mindful of the adverse consequences which it can have for the natural resource as well as the social dislocation which often accompanies change. Though we now have a clearer understanding of the impact of fisheries technology and the circumstances in which it may produce either propitious or harmful effects, there are still many unanswered questions concerning the process of change itself. A number of anthropological studies have made a valuable contribution to this issue by examining fishermen’s attitudes to new ideas, the cultural environment in which change takes place and the social constraints on innovation.* The present article, however, focuses more directly on the economic characteristics of technological change and the mechanism whereby new technology becomes incorporated into the fish production system. It starts by discussing the economic significance of technical progress, drawing attention to the perverse consequences which such ‘progress’ may have in unregulated open-access fisheries and the reasons why the benefits to society may not be fully realized. This is followed by a closer examination of the dynamics of change and the key elements which influence the fishermen’s decision to innovate. The article concludes with a discussion of the policy implications. Economic significance of technical progress In principle, technological advance in the form of more efficient production methods enables the productivity of factor inputs employed in an industry to rise. For society as a whole there are potential benefits from this, since it becomes possible to produce goods and services using fewer inputs per unit of output. Given that these inputs have an opportunity cost, productivity growth in one sector raises the productive potential of the overall economy. The actual benefits may materialize in various ways, such as higher profits and earnings for those in the industry itself or lower prices for consumers. Alternatively, the benefits 0308-597)(/90/010015-08$03.00 @ 1990 Butterworth & Co (Publishers) Ltd 15

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Though the aggregate effects of tech- nical progress in marine fisheries are often ambiguous and contradictory, the benefits of innovation which accrue to the individual fisherman may be sub- stantial. The conditions under which it pays to innovate are examined and the factors affecting t~hnoi~i~i diffu- sion are discussed. It is argued that policy needs to be able to anticipate the progress of technology in fisheries and that a flexible regulatory framework is essential if technological change is to be accommodated.

David Whitmarsh is Senior Lecturer in Economics and Head of the Marine Re- sources Research Unit, School of Econo- mics, Portsmouth Polytechnic, Locksway Rd, Portsmouth PO4 8JF, UK.

I am indebted to my colleagues in the Marine Resources Research Unit for their comments on an earlier version of this paper, and I would particularly like to thank Alan Radford for his advice on the analysis of replacement investment. The usual dis- claimer applies.

‘See. for example, R. Andersen and C. Wadel, eds, North Atlantic Fishermen: Anthropological Essays in Modern Fishing, Memorial University of Newfoundland, Newfoundland, 1972; and J.R. Maiolo and M.K. Orbach, eds, Modernisation and Marine Fisheries Policy, Ann Arbor Scien- ce Publishers, Ann Arbor, MI, 1982.

Technological change and marine fisheries development

David Whitmarsh

modernization of fishing vessels and the use of more efficient capture methods are regarded by many as the ‘active ingredients’ of fisheries development and a potential source of benefit for fishermen and society. Others are inclined to see technological change in a less favourable light, being mindful of the adverse consequences which it can have for the natural resource as well as the social dislocation which often accompanies change. Though we now have a clearer understanding of the impact of fisheries technology and the circumstances in which it may produce either propitious or harmful effects, there are still many unanswered questions concerning the process of change itself. A number of anthropological studies have made a valuable contribution to this issue by examining fishermen’s attitudes to new ideas, the cultural environment in which change takes place and the social constraints on innovation.* The present article, however, focuses more directly on the economic characteristics of technological change and the mechanism whereby new technology becomes incorporated into the fish production system. It starts by discussing the economic significance of technical progress, drawing attention to the perverse consequences which such ‘progress’ may have in unregulated open-access fisheries and the reasons why the benefits to society may not be fully realized. This is followed by a closer examination of the dynamics of change and the key elements which influence the fishermen’s decision to innovate. The article concludes with a discussion of the policy implications.

Economic significance of technical progress

In principle, technological advance in the form of more efficient production methods enables the productivity of factor inputs employed in an industry to rise. For society as a whole there are potential benefits from this, since it becomes possible to produce goods and services using fewer inputs per unit of output. Given that these inputs have an opportunity cost, productivity growth in one sector raises the productive potential of the overall economy. The actual benefits may materialize in various ways, such as higher profits and earnings for those in the industry itself or lower prices for consumers. Alternatively, the benefits

0308-597)(/90/010015-08$03.00 @ 1990 Butterworth & Co (Publishers) Ltd 15

Technological change and marine fisheries development

*An analysis of the bioeconomic effects of efficiency improvements and technical progress can be found in S. Cunningham, M. Dunn, and D. Whitmarsh, Fisheries Economics: An Introduction, Mansell, Lon- don, 1985; and L. Anderson, The Econo- mics of Fisheries Management, Johns Hopkins University Press, Baltimore, MD, 2 ed, 1986. 3D.H. Cushing, The Provident Sea, Cam- bridge University Press, Cambridge, UK, 1988, pp 136-l 31.

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may be indirect; higher productivity may result in a release of labour which can then be made available for re-employment in other sectors of the economy, assisting in their development.

But in industries based on common property resources, of which

marine fishing is the classic example, the potential benefits of new technology may be partly cancelled out by the tendency for the natural resource to become depleted. The precise way in which this occurs has been explored in some detail by a number of economists, but the essence of the explanation is as follows.2 The adoption of new technolo- gy by fishermen, by raising efficiency and profitability, results in intensified fishing by established operators and also acts as an incentive for newcomers to adopt the new technology and enter the fishery. However, intensification tends to deplete the natural resource which, being common property, adversely affects all firms that are exploiting it. Specifically, stock depletion implies a fall in catch per unit of effort for each participating firm. Though fishermen may attempt to overcome this tendency by further improving their efficiency, the aggregate effects will be self-defeating if this only serves to increase pressure on the fishery. This is not all. The natural resource also sets an upper limit to the long-run total yield so that, as the fishery expands from a low level of exploitation, yield will rise until maximum sustainable yield is reached, but will then decline as fishing is further intensified.

The analysis suggests, therefore, that technical progress may contri-

bute to the growth and development of fisheries but may also be indirectly responsible for their overexploitation. The supporting evi- dence for this can be seen in what has happened to many world fisheries in the post-1945 period which have undergone expansion and then decline under the stimulus of technological advance. The expansionary phase is one which produces real benefits in terms of output, employ- ment and income generation. However, the end result of the process - that of a technically sophisticated, modern, but grossly overcapitalized fishing industry attempting to earn a living from a heavily depleted resource - is one which must be depressingly familiar to policy makers. Moreover, this is not just a phenomenon of the last 40 years. While mechanization contributed greatly to the increase in catches which occurred during what has been termed the ‘first’ industrialization of fisheries in the 19th century, depletion of fish stocks also took place as a consequence of that process. Cushing cites evidence to show that catch per unit of effort in the English North Sea trawl fishery declined by almost one-half over the decade 1889-98, during which period the steam trawler was becoming more widely used.3 Nor should it be assumed that the negative effects are confined only to the fisheries of developed Western countries. Vessel upgrading has also lead to intensification of fishing and overexploitation, especially in inshore waters, in the fisher- ies of some developing countries,

The question which naturally follows, then, is what is driving this process? The role which the individual fishermen play is clearly central, and in order to understand the dynamics of change we need to examine the circumstances in which fishermen will be induced to abandon old technology in favour of new. For the purposes of showing the bioecono- mic effects of technical progress it may be sufficient to argue that fishermen adopt new technology on the expectation of greater ‘econo- mic performance’, but in practice fishermen are likely to have quite specific criteria on which to judge the acceptability or otherwise of

MARINE POLICY January 1990

Technological change and marine fisheries development

technical innovations. These need to be looked at if we are to understand why technological change takes place at all.

The dynamics of change

The adoption of new technology can be viewed as one of a range of competitive strategies available to commercial fishing firms. The rate at which innovations are absorbed into the fishing industry varies widely, depending not only on the specific advantages offered by each innova- tion but also on the characteristics of firms and the environment in which they are forced to compete. It obviously makes a difference to the outcome whether the innovation is a radically new method or merely a small improvement in technique, whether the potential user is a large multivessel organization or a single boat operator, whether the fishing community is generally progressive or conservative, and whether the pressure to improve efficiency is intense or otherwise. Nor should it be forgotten that governments can be influential in this respect. For while there may be public funding for marine science and technology and support for the aims of fisheries development, there may also be restrictions imposed on the use of certain gear and equipment which can be used to exploit fisheries.

Innovation as an investment decision

In order to understand the dynamics of change it needs to be appreci- ated that the adoption of new technology normally requires an initial capital outlay. Innovation is thus essentially an investment decision, in which the costs incurred and revenues generated arise over several time periods. Governments and their agencies implicitly acknowledge this fact in the way they attempt to accelerate the process of technological change in the catching sector of the fishing industry. It is common, for example, for investment incentives to be given in the form of grants and loans for the re-equipping of old vessels and the purchase of new ones. This can be viewed as an attempt to alter the threshold at which investment - and hence innovation - becomes worthwhile.

The conditions under which it will pay to go ahead with an item of capital expenditure are a standard exercise in capital budgeting, a summary of which is given in the Appendix. The crucial point to note, however, is that the promise of higher productivity and lower unit costs does not, in itself, make an innovation worth adopting; the improve- ment in performance must be sufficiently great that an adequate return on investment is achieved. Hence, the fact that an innovation is technically superior does not automatically ensure that it is profitable in a capital budgeting sense. Nissan, Daniel and Williams rightly empha- size this in their discussion of fishing vessel modernization.4 Using fuel-saving technology as an illustration, they demonstrate that there will be circumstances when reductions in operating costs may not be sufficient to justify the relatively heavy outlay on fuel-saving invest- ments.

“E. Nissan, D. Daniel and DC. Williams, It does not follow, however, that any fishing innovation which

‘Some economic principles of fishing ves- satisfies the investment criterion will be adopted. Fishermen may wish sels investment: an example for fuel- saving technology’, in Proceedings of the

to innovate but are prevented from so doing by shortage of capital. This

International Conference on Fisheries, Vol is known to be a problem in developing countries, but there are also

1, University of Quebec at Rimouski, documented cases of lack of capital acting as a constraint on innovation Rimouski, Canada, 1966, pp 217-220. in the fishing communities of developed western nations. In the

MARINE POLICY January 1990 17

Technological change and marine fisheries developmenl

%.A. Goodlad, ‘Old and trusted, new and unknown: technological confrontation in the Shetland herring fishery’, in R. Andersen and C. Wadei, eds, op cif, Ref 1, pp 61-81. 6These figures are based on data given in the Annual Report of the Herring Industry Board for 1971, 7The seminal work is that of W.E.G. Salter, Fro~uc~vi~ and Technical Change, Cam- bridge University Press, Cambridge, UK, 1969.

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Shetland herring fishery, for example, it is recorded by Goodlad that in the 1960s the switch from drift netting to purse seining was hampered by the difficulties which the younger fishermen faced in obtaining finance.” The adoption of new technology may be similarly constrained where a firm is faced with a choice of two or more innovations which are mutually exclusive. Adoption of one necessarily precludes the rest, even though they may all be acceptable in terms of profitability. As an illustration of this, the uptake of purse seining within the UK fishing fleet during the 1960s and early 1970s was probably impeded by the competition it faced from pelagic trawling. The superiority of either of these techniques over the traditional methods of drift netting and ring netting would doubtless have been recognized, but for the individua1 fisherman the choice was a mutually exclusive one. In the event, pelagic trawling proved to be the more acceptible, so that by 1971 51% of herring was taken with trawls as against only 24% with purse seines.”

The analysis so far has attempted to identify the circumstances in which innovations will be adopted by commercial fishing firms. What it fails to do, however, is to explain why the use of new fishing technology typically becomes more widespread as time passes. In some cases this can be attributed to improvements in the innovations themselves, which widens the scope of their application. An example of this is marine electronics, which before the 1960s were used only to a limited extent in inshore fishing vessels. The subsequent introduction of miniatur~ed componants, by reducing space and power requirements, made it feasible to use radar and similar devices on smaller craft. However, while it may often be the case that innovations are improved or possibly combined with other technologies so as to increase their applicability, this does not constitute a convincing theory of technological diffusion.

There are, broadly speaking, two principal mechanisms which help to bring about the gradual replacement of older technologies. Firstly, movements in prices and costs will take place during the course of fisheries development. This will change the profitability of fishing, which in turn will cause fishermen to reconsider their choice of technique. Secondly, inforl~ation about new methods and practices will tend to become more widely disseminated as adoption proceeds, and this will reduce the uncertainty surrounding the use of new technology. Each of these mechanisms will now be considered in turn.

Price nnd cost clzanges. The development of fisheries wilt normally be accompanied by changes in prices and operating costs, which in some circumstances will have the effect of coercing fishermen into switching to more efficient techniques. The response will not be uniform or instantaneous because operating units will differ in their efficiency. The expectation is that, in general, the least efficient units will be under the greatest pressure to be modified or replaced.

The adjustment mechanism can be analysed more formally using a variation of the ‘vintage’ model of investment, which is one of the traditional economic theories of technological change in industry.7 The model characterizes an industry as being made up of a spectrum of capital vintages, each embodying the best-practice technology of its date of construction. Though much of the equipment employed in the industry may be old and relatively inefficient, it is worth retaining so

MARINE POLICY January 1990

Technological change and marine fisheries development

long as its revenues cover its operating costs. The advent of a cost-saving

innovation will, in the first instance, make it worth replacing some of the older equipment where their operating costs exceed the total costs of the new equipment.’ An additional consequence, however, is that product prices are likely to fall as output and capacity expands, making it no longer worthwhile to retain the oldest capital vintages that had previous- ly just covered their operating costs. As each innovation is offered and accepted by the industry, a new equilibrium emerges and old capacity is replaced.

Now there is evidence that a mechanism of this kind can and does operate in fishing. The development of the UK mackerel fisheries, which took place against a background of technological change in fishing methods, was also accompanied by major changes in price. Lockwood demonstrates that the real quayside price of mackerel in 1975 was no more than one-quarter of what it had been in the early 196Os, with the period 1970 to 1975 showing an especially steep fall in price.’ This trend, taken together with the generally adverse changes in fuel costs, undoubtedly forced many fishermen to switch to more productive techniques or else to leave the fishery altogether. Unfortunately, however, this particular fishery may not be totally representative of the way price changes influence the choice of technique. Not only are prices in most fisheries quite volatile from year to year, but in theory a long-run trend of lower prices would only be expected to occur as output from the fishery expands towards maximum sustainable yield. Where intensified fishing causes yields to fall, price may then start to rise. In itself this might be expected to relieve the pressure on owners to scrap obsolete vessels or otherwise change their methods of fishing. If that is so, then the mechanism of change envisaged by the vintage model will not operate in fishing in quite the same way as it does in ‘normal’ industries.

In fact there is likely to be a much more regular and persistant influence at work. As suggested earlier, development of a fishery will generally be accompanied by stock depletion and a decline in catch per unit of effort. Fishermen using a particular technique will experience a fall in catch rates, which in turn will make it more expensive to harvest a given quantity of fish. Under such circumstances it is not difficult to see how low-productivity methods of fishing, or vessels embodying the design and technology of an earlier generation, may be abandoned. In this situation the economic pressure to respond comes not from falling prices but from rising costs, occasioned by the externalities arising from the exploitation of the common property resource.

‘The point here is that existing equipment is judged on a different criterion from that of the new equipment it is proposed to install. For existing equipment, invested capital is a sunk cost and therefore ceases to be relevant to the question of whether such equipment should be kept going or scrapped; it pays to keep it going so long as it earns a surplus over operating costs. For prospective investment in new equip- ment, however, total costs (including an allowance for an acceptable return on capital) are the legitimate concern. When deciding on replacement, therefore, the vintage model asserts that the relevant comparison is between the ooeratina costs of the old with the total costs of thenew. ‘S.J. Lockwood, The Mackerel: Its Bioloav. Assessment and the Management 074 Fishery, Fishing News Books, Farnham, UK, 1988, pp 121-131.

Information transfer. Information about new techniques and practices will invariably be very limited to start with, but as adoption proceeds so the pool of experience and knowledge widens. Contact between fisher- men causes information to spread, and this enables non-adopters to make a more realistic assessment of the risks and benefits associated with innovating. The diffusion of innovations throughout the fishing industry will therefore be contingent upon the speed at which informa- tion is disseminated and the ability of potential users to learn what the new technology involves.

Now there are certain features of the fishing industry which have a bearing on the way in which relevant information is spread and assimilated. On the one hand, the geographical mobility of vessels will

MARINE POLICY January 1990

Technological change and marine fisheries developmem

help to increase interpersonal contact between users of different fishing methods. Where a new method is conspicuously successful this may act as a strong stimulus to diffusion. The story is told by Thomson of how fishermen at Humberside were encouraged to use seine netting after the Danes took to landing their catches at Grimsby in 1918, their decks laden with fish following their pioneering use of this method.‘”

In other situations, however, relevant knowledge about new technol- ogy will be deliberately guarded. A progressive minority of fishermen who have acquired experience of a particular new technique will not wish to see their competitive edge eroded by unrestricted use. In the face of questioning by other fishermen, they may be evasive or misinformative. A classic instance of this is described by Acheson in his excellent study of the Maine lobster fishery.” In attempting to find out why the adoption of metal lobster traps had not been more widespread, despite a clear superiority over the traditional wooden type of trap, it was discovered that the users of the innovation consciously attempted to modify the perceptions held by the non-adopters. This phenomenon seems to be highly characteristic of many fishing communities, and has been described (somewhat euphemistically) as ‘information manage- ment’ .

Finally, it must be appreciated that in the fishing industry the whole nature of the production process hinders the evaluation of new technol- ogy. Bennett and Eddie put the point succinctly:

A recurring problem in fisheries development is that of justifying many of the new techniques or equipment in economic terms, in light of the enormous range of variables which can affect costs and earnings of a given vessel over a given period, on a given fishing ground. This means that small but important improvements in, say, catch rate, or the time the gear is on the bottom, etc, can be completely dwarfed by other variables affecting the results of the vessel, or vessels, on which the new technique is being assessed. These other variables include, of course, the seasonal and year-by-year fluctuations in catch rate, a change of skipper, and so on.12

In short, the volatile nature of the industry makes it difficult to evaluate the economic advantages of innovations, except possibly after many months of trial. This means that the pioneer fisherman will delay his commitment to full-scale adoption until this lengthy evaluation period is complete, while the response time by the ‘wait and see’ fishermen who take their lead from the pioneers will be longer still.

The policy challenge

The contention of this paper is that technological change in marine fisheries needs to be viewed as a process in which the agents of change - the fishermen - will be responsive not only to the specific opportunities which each innovation offers but also to a whole set of influences in their

“‘II Thomson, The Seine Net: Its Origin, economic environment. This environment will itself be shaped by

Evc&ion and Use, Fishing News Books, technical progress, because what fishing firms do in the aggregate will Farnham, UK, 1969, p 12. affect prices, costs and the availabilitv of information. It follows. “J.M. Acheson, ‘Metal Traps: a key in- novation in the Maine Lobster Industry’, in

therefore, that technical progress in marine fisheries should be though;

JR Maiolo and M.K. Orbach, op tit, Ref 1, of not so much as a linear sequence of events but rather as a recursive pp 279-312. “FL Bennett and G.C. Eddie, ‘Im-

process in which many of the key elements are interdependent. This

plementing the results of a development interdependence means, however, that the responsibility for promoting

programme’, Fish /n&sky Review, Vol 1, technological advance in fishing cannot realistically be separated from No 1, 1971, p 12. the other areas of fisheries policy.

MARINE POLICY January 1990

‘3R. Hilborn and J. Sibert, ‘Adaptive man- agement of developing fisheries’, Marine Policy, Vol 12, No 2, April 1988, p 114. 14FA0, Strategy for Fisheries Manage- ment and Development, Food and Agricul- ture Organisation, Rome, 1986, p 9. ‘%ee, for example, J.E. Wilen, ‘Fisherman behaviour and the design of efficient fisheries regulation programmes’, Journal of the Fisheries Research Board of Cana- da, Vol36, 1979, pp 85-58. “P. Copes, ‘A critical review of the indi- vidual quota as a device in fisheries management’, Land Economics, Vol 62, No 3, 1986, pp 278-291. 17S. Jentoft, ‘Fisheries co-management: delegating government responsibility to fishermen’s organizations’, Marine Policy, Vol 13, No 2, April 1989, pp 137-l 54.

Technological change and marine fisheries development

Perhaps the fundamental issue as far as policy is concerned is the need to monitor the advance of fisheries technology and, where possible, to forecast its future time path. Hilborn and Sibert usefully summarize both the nature of technological change and the challenge which it presents to policy makers when they remark that changes in vessel efficiency and the cost of fishing ‘are the most certain events in fisheries management - they happen in nearly every fishery and should be anticipated as the fishery develops’.13 It is precisely the need to anticipate technological change which is central to the implementation of a coordinated policy of fisheries regulation and development.

There are two further practical consequences which follow from what has been said. To start with, it must be recognized that technological change is unlikely to succeed in raising productivity in heavily exploited fisheries unless accompanied by some form of regulation. Indeed, the paradox of marine fisheries development is that the more successful it is in terms of vessel upgrading and modernization, the greater is the need for constraint on fishing effort in order to maintain the natural resource. Fortunately, many governments and international agencies now accept that regulation and development go hand in hand. The FAO have lately affirmed their belief that fisheries management ‘should be conceived and understood not as a constraint upon rational exploitation but as an essential tool for the sound, sustained development of fisheries’.14 They thus see conservation and management as an integral part of the developmental process.

The character of technological change also dictates to some extent the form which fisheries regulation should take. The post-1945 period has witnessed a large number technical innovations being offered to the fishing industry, within which change and modernization has built up a momentum of its own. Arguably, therefore, the regulatory framework needs to be flexible enough to accommodate the effects of continuous improvement resulting from the desire by fishermen to raise their efficiency. Limited entry schemes which have attempted to control only one component of fishing effort (eg vessel tonnage) have often failed to halt the growth in catching capacity as fishermen seek to circumvent the restrictions by upgrading their boats. This difficulty has led many observers to conclude that the most suitable framework of fisheries regulation is one which awards fishermen an individual quota but allows them to use whatever configuration of inputs they wish.” Individual quota schemes are not without their problems, however, as Copes has pointed out. l6 More recently, Jentoft has emphasized that the success of any regulatory scheme depends upon its legitimacy and acceptance with fishermen.17 While we should therefore not regard output control methods of regulation as a panacea for the problems of fishing, in principle at least they provide a way of reconciling the economic behaviour of fishermen with the goal of securing a productive and technically progressive fishing industry.

Appendix Innovation as an investment decision more complex and also involves the determination of the

optimal replacement period. Assuming, however, that In principle, an investment project is worth undertaking if technical or legal constraints dictate that replacement must it is expected to yield a positive net present value (NPV). occur after a specified number of years, (t), then in theory Where the decision is one of replacement (eg an older it pays to replace if the NPV in the expression below is vessel with a newer one), then the decision rule is rather positive:

MARINE POLICY January 1990 21

NPV = ’ 5’ [Cost savings from the new equipment]

r=O [l c r]

plus: Scrap value of old equipment today

plus: [Scrap value of new equipment in year t]

fl -I- i-1

minus: Capital outlay on new equipment

Where: r = discount rate representing the opportunity cost of capital

I = time periad of cash flow

Algebraically, this can be represented as:

plus: SY

Where: Vc’ = average variabie cost

s-2 = quantity FC = fixed cost excluding de~reeiat~on S = salvage value f = initial capital outlay

Subscripts x and y refer to new and old equipment respectively

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