Discounted Cash Flow Analysis of Financial Returns from Biomass Crops in Ireland Clancy et al. 1 JOURNAL OF FARM MANAGEMENT VOL.13. NO.9. PAGES 1-17 REFEREED PAPER A DISCOUNTED CASH FLOW ANALYSIS OF FINANCIAL RETURNS FROM BIOMASS CROPS IN IRELAND D. Clancy, J. Breen, A.M. Butler, F. Thorne, M. Wallace The economic case for the production of biomass crops can only be established through a comprehensive analysis of the potential costs and returns of these crops. Using data from Ireland, this paper provides a Discounted Cash Flow (DCF) investment analysis for two of the most common biomass crops, willow and miscanthus. We find that miscanthus consistently generates investment returns greater than willow. Sensitivity analysis is used to examine the effects on the estimates of variation in key physical and financial parameters. The superseded enterprise, establishment grant level, yield level, price level, and length of production lifespan are shown to significantly influence the returns generated by investments in willow and miscanthus. Due to the level of risk involved in growing biomass, widespread adoption in Ireland is only likely when the economic merits of these crops have been proven over an extended period. Keywords: Willow, Miscanthus, Discounted Cash Flow, Sensitivity Analysis 1. Introduction: There has been a recent surge of interest in the potential of biomass as an alternative to fossil fuels within the EU. Rising oil and gas prices, concerns about the security of imported energy supplies and Kyoto targets to reduce greenhouse gas emissions have been the principal drivers of government policy to increase the use of biomass in energy and heat production (Department of Communications, Marine and Natural Resources, 2007). As in other countries, the Irish Government has enacted measures to incentivise the production of biomass crops (Department of Communications, Marine and Natural Resources, 2007). Farmers who diversify into biomass crops can receive establishment grants to offset part of the initial setup costs and they are also currently eligible for an energy crop subsidy of €45 per hectare. In addition, under the recent CAP reforms, EU agricultural subsidy payments are substantially de-coupled from production. This allows farmers a greater freedom to switch to alternative enterprises, such as biomass crop production, without reducing the value of their existing single farm payment entitlements. Consequently, farmers may have an important diversification opportunity which merits careful financial analysis. From the view point of an individual farmer such analysis is not straightforward. There are important risks associated with adopting an enterprise that does not yet have a proven track record. For example, there are important questions about future demand/prices and the direction of government policy affecting biomass crops over the longer term. There is also uncertainty about potential yields since available data are based on small samples of experimental trials that have been running over a limited number of years. This makes it difficult to establish how yields are influenced by production factors and the extent of variability from site to site and over time. These risks associated with biomass crops are accentuated by their lengthy