Question 13.OA.1: Cow-Milking Robots at Mason Dixon Farms Mason Dixon Farms (M...
Cow-Milking Robots at Mason Dixon Farms
Mason Dixon Farms (MDF) is one of the oldest and largest dairy farms in the US state of Pennsylvania. An industry leader in the adoption of new technologies and processes, MDF currently faces a number of challenges that potentially affect its long-term profitability. These issues include residential growth that increases the value of farmland, the owners’ quality of life, the management of its growing labor force, and per-cow productivity. Some of these factors are difficult, if not impossible, to quantify in monetary terms but influence decisions made about production operations and capital investments. MDF has been considering the purchase of 40 robotic machines to milk its dairy herd of 2,000 cows. An alternative is the investment in a carousel milking parlor. The approximate capital investment in the robots is $6 million while the milking parlor requires an investment of $1 million. Both investments exclude the cost of additional buildings and equipment needed in either case. Robotic milking systems were developed initially in the Netherlands in the 1980s with the first commercial use in 1992. They are popular in Europe, where more than 90 percent of the farms worldwide that use robotic systems are located. They are also popular in Japan, Israel, and Canada. A key factor in MDF’s decision is the impact of a robotic system on the farm’s labor force. As MDF has grown in scale, its dependence on hired labor has increased substantially. The management of this labor force has added to the complexity of its operations, especially as most are migrant workers from outside the US. In turn, these complexities affect the quality of life of farm management and owners. The owners expect a reduction of 75 percent in its labor costs with the robotic milking system. Robotic systems also offer advantages in terms of milking time, animal welfare, and performance measurement. These systems track individual cow performance (production per cow, milking frequency, milk quality, etc.) and can detect medical problems. While studies have shown that robotic systems may be profitable investments, research suggests that non-monetary factors (less milking time, improved animal welfare) are also very important. The management of MDF’s labor force is one such factor. Robotic systems are sourced in Europe; thus, exchange rate fluctuations play a role in the investment decision. MDF’s capital budgeting decision process has followed the steps outlined in this chapter. Farm management gathered relevant data for both alternatives: purchase cost, production costs, other expenses, (e.g., labor, feed, and maintenance), anticipated inflation rates, tax rates, the price of milk, the equipment’s useful life, and depreciation period. MDF set its discount rate at 5 percent for both options. The NPV of both options was determined, along with a series of sensitivity analyses related to changes in milk prices, production levels, and exchange rates. After making its investment decision to adopt the robotic technology, MDF owners have continued to evaluate the project and to monitor results. Assume that the NPVs of the two investments were equal. Should MDF proceed with the investment in a robotic system? What conclusions could we draw about the value of non-monetary factors? What advice would you offer MDF’s owners if the expected profits from using robots were less than those from installing a carousel milking parlor? How might MDF hedge its investment in the robotic technology?
