Cost–benefit analysis and investment appraisal for sugarcane cultivation in Sevanagala, Sri Lanka

Introduction

Sewanagala area is very popular among the nation for the sugar cane cultivation since 1986; at that time there were 3860 hectares, and today it has varied to 4215 hectares. and there is extended land is 7815 hectares. Sugarcane cultivations are carried on under irrigated and rain fed land. People who live in Sewanagala area whose main income way is cultivating sugarcane.

In addition, there is a sugar manufacturing company which is Sewanagala Sugar Company, and it is one of the main sugar manufacturing companies in Sri Lanka which is situated in Monaragala district. The company is fully owned under the Government of Sri Lanka.it is managed by the ministry of plantation.

Normally, annual per capita consumption of sugar in Sri Lanka is about 30 kg, and the total annual requirement of sugar in country is around 550000 MT. but in Sri Lanka can only produce 50000 MT per year.

Therefore, the shortage of the annual requirement must be imported from another country. The annual expenditure on sugar imports is 55 million, but if there is a way to increase the sugarcane production, that will help to save that expenditure on sugar. that not only contributes to increasing agricultural productivity but also brings significant socioeconomic benefits to our community.

If someone is willing to cultivate sugarcane, they can inform the company and then continue their progress then there will be no barriers to when they supply their sugarcane harvest, since the company has enough facilities to crush the cane

Normally, sugarcane cultivates as hectares. For one hectare, it can yield 100-120 metric tons of harvest, where farmers receive 12000 rupees per ton.

In addition, using 1 metric ton, it can produce 140-160kg sugar.

Currently, there are some types of sugarcane seed type, like CO -775, SL96-128, SL88-116, SL92-4918, SL96-328, and SL98-2524. But the same price is given for all types of seeds. You can see pictures of this type in the appendix. It helps to get a brief idea about sugarcane seed types.

Objectives Of The Project

Simply I can say be a farmer who cultivates sugarcane, they can fulfil social mission. because there are some common objectives associated with sugarcane cultivation.

Sugar production: the primary objective is to produce sugar. It helps to increase sugar supply for the domestic market.

Economic profitability: when farmers provide their harvest to the company, they receive income that increases their family`s standard of living

Diversification and crop Rotation: sugarcane cultivation is a part of a crop rotation strategy where it is grown in alternating cycles with other crops. This helps improve soil health and reduce the risk of pets and this help to maintain a sustainable and balanced farming system.

Employment and rural development: it creates job opportunities from its plantation proceeds to getting harvest, in rural area people can engage with the sugarcane field and earn money that helps to reduce unemployment.

Energy and biofuel production: the fibrous residue left after sugar extraction can be utilized for energy production. Such as electricity or biofuels like ethanol, this promotes renewable energy sources and contributes to sustainable development objectives.

Environmental sustainability: it includes reducing water consumption, adopting responsible use of fertilizer and pesticides, promoting soil conservation techniques and preserving biodiversity. The goal is to ensure that sugarcane cultivation is environmentally sustainable and preserves natural resources for future generations.

Literature Review

Sugarcane is an important commercial crop since that is the raw material for sugar. In Sri Lanka most people tend to drink tea, milk or other drinks to creating that beverages as well as most of the food it needs sugar. For fulfilling that domestic consume sugar industry produce sugar while providing employment opportunities for farmers. For sugarcane cultivation there is need land, labor, fertilizer, planting materials, and transportations cost. Then before the cultivation sugarcane farmers should get to idea whether the income generated through the sugarcane is sufficient to cover the cost for sugarcane cultivation. Hitch means there should be a cost-benefit analysis approach for sugarcane cultivation. (Sugarcane Research Institute [SRI], n.d.).

Sewanagala is a suitable location for growing sugarcane because sugarcane production has been closely associated with the development of the Sevanagala Sugar Development Project and the local sugar industry.

An early socio-economic assessment of the Sevanagala Sugar Development Project examined the economic situation of local farmers and the cost of producing sugarcane among smallholders (Tennakoon & Dharmalingam, 1993). This study provides a key historical background for understanding sugarcane farming in Sevanagala. However, agricultural production conditions have changed significantly over time. Since those earlier studies, input prices, labour costs, fertiliser prices, machinery costs, irrigation expenses, production technologies, and sugarcane purchase prices have all shifted.

2. Cost of Sugarcane Production

Cost is a key factor in the profitability of sugarcane cultivation. Main production costs include land preparation, planting materials, fertiliser, agrochemicals, labour, machinery, irrigation, harvesting, and transportation. Besides direct cash expenses, farmers often use family labour and their own land and machinery. So, a full cost analysis should include both cash and non-cash costs to estimate the real economic cost of production. The Sugarcane Research Institute has regularly assessed sugarcane production economics because costs and returns change with input prices, output prices, production technologies, and cultivation conditions (SRI, 2023).

Previous research conducted in the Sevanagala sugar factory area demonstrates that the cost structure differs between plant-crop and ratoon-crop cultivation. Samaraweera (2019) reported that plant-crop sugarcane had a higher average production cost than ratoon sugarcane. The study found that approximately 80% of the farmers studied were cultivating ratoon crops. The average yield was approximately 101.3 tonnes per hectare for plant crops and 92.01 tonnes per hectare for ratoon crops (Samaraweera, 2019).  This indicates that higher physical productivity does not necessarily mean higher financial profitability. Both production yield and production cost should be considered when evaluating the economic performance of sugarcane cultivation.

The difference between plant and ratoon cultivation is particularly important for investment sappraisal. The first sugarcane crop normally requires higher initial investment because farmers must prepare the land and establish the crop. In contrast, ratoon crops can be maintained after harvesting the initial crop with lower establishment costs. Therefore, analyzing only the first harvest may underestimate the overall economic attractiveness of sugarcane cultivation. The Sugarcane Research Institute has recognized the importance of evaluating the economic performance of different sugarcane cultivation cycles and determining appropriate replanting periods (Keerthipala & Dharmawardane, 2000). This indicates that there is a requirement to consider the complete investment period rather than analyzing only one production season.

3. Profitability of Sugarcane Cultivation

Profitability is another important aspect of sugarcane production. Profits are calculated by subtracting the total cost from the revenue that can be gained by selling the sugarcane harvest. Previous studies mentioned that sugarcane cultivation can generate positive returns for farmers in Sri Lanka, but profitability depends on yield, cultivation system, production costs, and the price received for sugarcane. A study of sugarcane production in Sri Lankareported differences in costs and returns between irrigated and rain-fed production systems, demonstrating the importance of production conditions in determining farm profitability (Parliament of Sri Lanka, 2024).

One study has found that farmers can earn benefits from sugarcane cultivation, but several constraints can reduce profitability. Samaraweera (2019) identified low profitability, irrigation problems, transportation losses, limitations in extension services, and issues associated with grading and purchasing as important constraints affecting sugarcane farmers. The study also found that some farmers had moved towards alternative crops such as paddy, maize, cowpea, and coconut (Samaraweera, 2019). This finding is important because farmers generally consider the expected return from different crops when deciding how to use their land and labor. Therefore, sugarcane should be evaluated not only based on whether it produces a positive profit but also according to whether its return is attractive enough compared with alternative agricultural investments.

International studies provide additional evidence about the profitability of sugarcane production. Jawanjal et al. (2015) found positive benefit–cost ratios for both plant and ratoon sugarcane cultivation, with the plant crop recording a benefit–cost ratio of approximately 1.66 and ratoon cultivation approximately 1.57. These results indicate that sugarcane can provide benefits greater than production costs under suitable production conditions. However, international findings cannot be directly applied to Sevanagala because production conditions, labor costs, input prices, sugarcane prices, climatic conditions, and government policies differ between countries. Therefore, international research is useful for understanding general economic relationships, while local evidence is more appropriate for estimating the actual investment viability of sugarcane cultivation in Sevanagala.

4. Influence of Yield and Sugarcane Price

Yield and selling price are two major determinants of sugarcane profitability. A higher yield generally increases revenue if the selling price remains constant. However, the financial return obtained by farmers also depends on the price paid for harvested sugarcane. Therefore, a farmer can experience lower profitability even when achieving a reasonable yield if the purchasing price is insufficient to cover increasing production costs. Samaraweera (2019) identified profitability and issues related to the sugarcane purchasing system as important concerns among farmers in the Sevanagala sugar factory area.

The choice of sugarcane variety can also affect production and economic returns. Samaraweera (2019) reported that farmers in the Sevanagala area preferred certain varieties because of their relatively high yield and the characteristics of the existing purchasing system. This demonstrates that farmers' variety-selection decisions are influenced not only by biological characteristics such as yield and sugar content but also by the way farmers are paid for their harvested cane. Therefore, an investment appraisal should use the actual price received by farmers rather than relying only on general market prices. The analysis should also consider how changes in yield and price influence the overall profitability of the investment.

5. Importance of Ratoon Crops

Ratoon cultivation is an important characteristic of sugarcane production and has a direct influence on investment performance. After the initial plant crop is harvested, farmers can obtain additional ratoon crops without completely re-establishing the field. Because some establishment costs are avoided, ratoon crops may have lower production costs than plant crops. However, ratoon yield can decline as the number of ratoon cycles increases. Therefore, farmers need to determine the point at which continuing ratoon cultivation becomes less economically attractive than replanting the field.

This issue has been examined in Sri Lankan sugarcane research. Keerthipala and Dharmawardane (2000) investigated methods for determining optimal replanting cycles for sugarcane production in Sri Lanka. More recent research has also focused specifically on the economically optimal ratoon cycle in Sevanagala using farm-level production data. Weerasinghe et al. (2026) examined ratoon-cycle economics using data covering several production years and highlighted the importance of determining an economically suitable period for maintaining ratoon crops. These studies indicate that the duration of the sugarcane production cycle is an important factor in determining the overall economic return from sugarcane investment.

For this reason, the proposed study should consider the initial plant crop together with subsequent ratoon crops. A farmer's investment decision is based on the total expected costs and benefits over several production years rather than the financial performance of only one harvest. Including the entire production cycle can therefore provide a more realistic assessment of the long-term profitability of sugarcane cultivation in Sevanagala.

6. Cost–Benefit Analysis

Cost–benefit analysis is a commonly used approach for evaluating whether the benefits of an investment are greater than its costs. In agricultural projects, the analysis can be used to compare the total economic or financial benefits generated by a project with the resources required to implement it. The Food and Agriculture Organization (FAO) identifies measures such as net present value, benefit–cost ratio, and internal rate of return as important tools for evaluating agricultural investments (Food and Agriculture organization [FAO], n.d.).

The benefit–cost ratio (BCR) is particularly useful for evaluating sugarcane cultivation because it provides an indication of the relationship between the benefits received and the costs incurred. A BCR greater than one indicates that the present value of benefits exceeds the present value of costs. However, BCR alone does not indicate the absolute amount of financial gain from an investment. Therefore, it is useful to combine BCR with other investment appraisal techniques when evaluating sugarcane cultivation (FAO, n.d.).

Net present value (NPV) is another important investment appraisal method. NPV considers the time value of money by converting future costs and benefits into their present values using an appropriate discount rate. This is particularly important for sugarcane because investment costs occur before farmers receive income from harvesting. A positive NPV indicates that the investment is expected to generate returns above the selected discount rate, while a negative NPV indicates that the investment may not be financially attractive under the assumed conditions (FAO, n.d.).

The internal rate of return (IRR) provides another measure of investment performance. IRR represents the discount rate at which the NPV of an investment becomes zero. It can be compared with an appropriate required rate of return or alternative investment opportunity. The combined use of NPV, IRR, and BCR can provide a more comprehensive understanding of whether sugarcane cultivation is financially viable (FAO, n.d.). Therefore, these measures are appropriate for evaluating sugarcane cultivation as a long-term agricultural investment in Sevanagala.

7. Risk and Sensitivity Analysis

Agricultural investments are associated with uncertainty because production and market conditions can change. Sugarcane farmers may face risks associated with rainfall, irrigation availability, pests and diseases, labor shortages, increasing fertilizer prices, increasing transportation costs, changes in sugarcane yield, and changes in cane purchasing prices. Research in the Sevanagala sugar factory area has identified irrigation difficulties, transportation problems, extension-service limitations, and profitability-related issues as important constraints faced by farmers (Samaraweera, 2019).

Therefore, investment appraisal should not rely only on a single set of expected costs and benefits. Sensitivity analysis can be used to examine how changes in important variables influence investment outcomes. For example, the proposed study could calculate the NPV, IRR, and BCR under different scenarios, such as a 10% increase in production costs, a 10% reduction in yield, or a change in the price received for sugarcane. This would help identify which variables have the greatest influence on the financial viability of sugarcane cultivation.

Such an approach is particularly important in Sevanagala because changes in production and processing conditions can influence the economic performance of the sugar industry. The Auditor General of Sri Lankahas reported issues affecting the performance and cost structure of the Sevanagala sugar-processing operation, demonstrating that environmental, production, and operational factors can influence the wider sugar industry (National Audit Office of Sri Lanka, 2024). Although factory-level costs are different from farm-level costs, these findings highlight the importance of considering uncertainty when assessing the economic sustainability of sugarcane production.

8. Research Gap

The existing literature demonstrates that sugarcane economics has been studied in Sri Lankaand specifically in the Sevanagala area. Previous research has examined the socio-economic effects of the Sevanagala Sugar Development Project (Tennakoon & Dharmalingam, 1993), production costs and sugar production (Keerthipala & Dharmawardane, 1999), optimal replanting cycles (Keerthipala & Dharmawardane, 2000), farmer constraints and profitability (Samaraweera, 2019), and more recent ratoon-cycle economics (Weerasinghe et al., 2026). These studies provide valuable information about sugarcane production, costs, yields, farmer behavior, and production constraints.

However, there is a need for an updated and integrated investment appraisal of sugarcane cultivation under current conditions in Sevanagala. Previous studies have often focused on individual aspects such as production cost, profitability, farmer constraints, cane pricing, or ratoon cycles. There is a comparatively greater need to combine current farm-level cost and benefit information with investment appraisal techniques such as NPV, IRR, BCR, and payback period, while also considering plant and ratoon crops and the effects of changes in major cost and revenue variables. The SRI's continuing economic research also demonstrates that production costs and returns need to be updated as input and output prices change (SRI, 2023). Therefore, the proposed study can address this gap by providing an updated assessment of whether sugarcane cultivation represents a financially viable investment for farmers in Sevanagala.

Methodology

Sugarcane cultivation requires a tropical or subtropical climate with temperature between 20 ^ºC to 30 ºC (68 ^ºF to 86^ºF) for optimal growth and requires a significant amount of sunlight and rainfall to support its growth. The plant thrives in well-drained soil rich in organic matter. According to these factors, there is suitable land for planting sugarcane in the Sewanagala area.as well as Sewanagala Sugar Company also there. Farmers who cultivate sugarcane can directly contact the company to supply their harvest. Therefore, there are successful environments for sugarcane cultivation.

Normally, after cultivation, within 11-12 months it receives harvest. Sugarcane is a versatile and economically important crop, providing a valuable source of sugar, energy, and various by-products. Its cultivation plays a significant role in the agricultural sector and contributes to the economy of many countries around the world.

Once it is cultivated, we don’t need to cultivate it again, and again it can harvest maximum 20 years if it is maintained correctly. We can harvest by cutting sugarcane again once a year.

It creates jobs in various stages of sugarcane cultivation, such as land preparation, planting, harvest and processing, since it creates jobs from land preparation stage to getting harvest. It particularly helps rural people to increase their standard of living.

Considering all these factors, a person is going to investment on5 hectare of irrigated sugarcane land to cultivate sugarcane in the Sewanagala area.in this project, I evaluate what are the cost and benefits for that and also how it can gain benefits not only that person but also overall the society.

Cost Structure.

There are 7518 hectares that can be used to cultivate sugarcane in sewanagala area. Among them Kamal is going to invest 5 hectares to cultivate sugarcane by informing to sewanagala sugar company. For that, he must incurred5,000,000 rupees (5 million) as initial cost. After acquisition lands in the same year, he expects to cultivate sugarcane.

Once sugarcane receives its harvest, they can get harvest again every year. So, it is estimated that after plantation, harvests will be received until the project lifespan. Project lifetime is 20 years, and cost of the capital is 10%. project is commenced in 2025 and end in 2045.Durring these time it assume market prices remain constant.

During the project lifetime he has expected to do all the growing and harvest tasks using labor. After cultivating the crop, with 2^ndyear onwards, he must bear the following cost only those are considered as operation and maintenance cost.

Operation and maintenance cost = 75937.5 + 34273.25 +262015.92

=372226.67

Benefit Structure

The acquisition of new land for sugarcane cultivation presents a compelling opportunity to achieve agricultural excellence while positively impacting our community; in this, I have identified some benefits.

1. Economic benefits: Increased agricultural productivity. This project aims to enhance sugarcane cultivation; it will increase crop yield and productivity

2. Employment opportunities: This project creates jobs in various stages of sugarcane cultivation, such as land preparation, planting, harvesting, and processing. This helps to reduce unemployment and provide income-generating activities

1. Rural development and poverty reduction

This project can contribute to overall rural development in the Sewanagala area by engaging in economic activities. Since it creates jobs, it will be an income source for a lot of people, and poverty levels in the local community will reduce

1. Environmental benefits

This project can promote sustainable agricultural techniques such as organic farming, efficient water management, and soil conservation. That will help protect environment and protect natural resources.

1. Financial benefits

The main financial receiving way of this project is supplying sugarcane harvest to the sugar company.

Normally, one hectare can yield at least 100 MT. According to that estimated harvest for 5 hectares is 500 MT. The company will be given 12000 rupees per MT.

Revenue=500*12000

=6,000,000

In addition, the company gives 1000000 rupees as dividends at the end of every year for those who were supplied more than 300 MT. So, this farmer also receives that chance since he supplies 500 MT per year. And, with continuous and correct cane field maintenance and estimated harvest will receive therefore, he is also lucky to get this chance during the project lifetime.

Total benefits = harvest+ dividends

=6,000,000+1,000,000

=7,000,000

Results And Discussion

1.) Payback period

Discounted payback period is = (5,000,000 / 6024645.957) *12

=9.95

= 10

The decision rule for payback period is: if the payback period is less than the project lifespan, the project can be accepted. According to this, the project payback period is 10 months, so the project can be accepted

2.Net present value (NPV)

According to this project, NPV is 51362584.4

The decision rule for NVP is: if NPV is positive or more than 0 the project can accept, according to this project, it is a positive value, so this project can be accepted.

3.Internal Rate of return (IRR)

IRR=R1 +(NVP1 / (NPV1 - NPV2)) *(R2-R1)

=0.1+ (51362584.4/51362584.4-27210978.38) *(0.2 -0.1)

=0.1+2.12*0.1

=2.2*0.1

=0.22

=22%

The decision rule of IRR is that if it is higher than the cost of capital, then the project can be accepted according to this project IRR > cost of capital

22% >10%

Since the IRR is higher than the cost of capital, this project can be accepted.

4.B/C ratio

B/C Ratio = Discounted Total benefit/ discounted Total cost

=56362584.4/ (5,000,000)

=11.27

=11

Decision rule of B/C ratio: if it is greater than 1, then the project can be accepted.

According to this project, the B/C ratio is greater than 1; it is11. So, this project can be accepted.

Sensitivity Analysis

It refers to what kind of impact there is when the initial cost of the project, annual cost, and annual benefit are changed.

Under sensitivity analysis, I evaluate,

I.) If discount rate increases by 10% while other factors remain, then what happens to NPV, IRR, Payback period, and B/C ratio

II.) If initial capital increased by 10%, what happens with NPV, IRR, Payback period, B/C ratio.

III.) If Total annual benefits increased by 30%, at the same time Total annual cost increased by 20%

I.) If the discount rate increases by 10%

1. payback period discounted payback period is = (5,000,000/ 5520935.184) *12

=10.86

=11

Payback period is 11 months.

1. Net present value (NPV)

According to this project, NPV is27210978.38

1. Internal Rate of Return (IRR)

IRR=R1 + (NPV1 / (NPV1-NPV2)) *(R2-R1)

=0.2+ (27210978.38/27210978.38-200248884.5) *(0.4-0.2)

=0.2-0.15* (0.2)

=0.05*(0.2)

=0.01

=1%

4.B/C ratio

B/C Ratio=32210978.38 /5,000,000

=6.44

=6

II.) If initial cost increased by 10%

5,000,000*10/100=500,000+ 5,00,000 Then new initial cost is 5,500,000

1. payback period discounted payback period is= (5,500,000/6,024,645.957) *12

=10.95

=11

Payback period is 11 months.

1. Net present value (NPV)

According to this project, NPV is 50,862,584.4

1. Internal Rate of Return (IRR)

IRR=R1 +(NPV1 / (NPV - NPV2)) *(R2-R1)

=0.1 +(50,862,584.4/50,862,584.4-27,210,978.38) *(0.2-0.1)

=0.1+2.15*0.1

=0.22

=22%

4.B/C ratio

B/C Ratio=Discounted total benefit /discounted total cost

=56,362,584.4/5,500,000

=10.24

=10

III.) If annual total cost increases by 20% as well as annual Total benefit increases by 30%

New annual cost = 372,226.67 *(20/100)

=74,445.34+372,226.67

=446672.004

New annual benefit=7,000,000*(30/100)

=2,100,000+7,000,000

=9,100,000(In rupees)

1.) Payback period=5,000,000/ 7865875.148*12

=7.6

2.) NPV is 68587901.28

3.) IRR =0.01+(68587901.28/68587901.28-37055174.06) *0.1

=0.22

4.) B/C ratio=73587901.28/ (5,000,000)

=14.71

Conclusion

According to this project, the payback period is less than the project lifetime, NPV is a positive value, and B/C ratio is higher than 1, as well as IRR is greater than the cost of capital it means all technical calculations are ok then this project can be accepted.

When considering the labor cost, it takes more percentage than other costs as we saw at the beginning in the pie chart, if reflect this project creates more jobs.

Farmer doesn’t worry about their income because there is permanent income way at every year. They do not need to work hard too much; there are only simply maintenances to do on sugarcane land even they can do it as a part-time job. In factor grows and grows where there is a suitable land

Cultivating sugarcane we can save money on sugar imports. By this project, its expected production is 500 MT per year since project lifetime is 20 years, 10000MT are there.

of this project we can save 10000 * 306 =3,060,000 rupees on imports.

Main Financial benefit received from this project is supplying harvest to the company; in addition, there are indirect advantages for farmers it is dividends.

If people tend to grow sugarcane, then sugar production increases when sugar production increases there is enough sugar to fulfil domestic demand, then we don’t import sugar from other countries.

Being farmers, there are not only personal benefits; there are also social benefits. Like Environmental benefits, rural development, reducing poverty, Create jobs, etc.

When the cost of the capital increase payback period increases, NPV decreases, IRR decreased, B/C ration decreased.

When initial cost increases, payback period increases, NPV decreases, IRR does not change, B/C ratio decreases.

When benefits are increased more than the cost then Payback period is decreased, NPV increased, IRR does not change, and the B/C ratio increased.