A Framework for Investment and Risk Assessment of Agricultural Projects

Leonir Vilani, Antonio Zanin, Mauro Lizot (), Marcelo Gonçalves Trentin, Paulo Afonso and José Donizetti de Lima
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Leonir Vilani: Graduate Program in Production and Systems Engineering, Federal University of Technology—Paraná, Pato Branco 85503-390, Paraná, Brazil
Antonio Zanin: Department of Accounting Sciences, Federal University of Mato Grosso do Sul, Campo Grande 79070-900, Mato Grosso do Sul, Brazil
Mauro Lizot: Department of General and Applied Management, Federal University of Paraná, Curitiba 80210-170, Paraná, Brazil
Marcelo Gonçalves Trentin: Department of Electrical Engineering, Federal University of Technology—Paraná, Pato Branco 85503-390, Paraná, Brazil
Paulo Afonso: Department of Production and Systems, Algoritmi Research Centre, University of Minho, Campus Azurém, 4804-533 Guimarães, Portugal
José Donizetti de Lima: Department of Mathematics, Federal University of Technology—Paraná, Pato Branco 85503-390, Paraná, Brazil

JRFM, 2024, vol. 17, issue 9, 1-15

Abstract: Investment appraisal of agricultural projects (APs) is particularly demanding due to several factors. Namely, APs may have longer time horizons, higher external and internal volatility, and uncertainty caused by less control of production and external conditions (e.g., climatic conditions and market demand). Indeed, these APs may face high and different risks that should be managed properly. Nevertheless, both the literature and practice do not address such complexity and uncertainty conveniently. Thus, this research aimed to develop an integrative and easy-to-use framework to support the investment appraisal of APs, which goes beyond the traditional approach based on simple and deterministic models. This framework is based on an approach that includes several capital budgeting techniques integrating extended multi-index methodology (EMIM), Monte Carlo simulation (MCS), and real options analysis (ROA). This framework allows dealing with different risk and uncertainty scenarios and managerial flexibilities, which allow alternative and additional investment options. A simpler and easier approach can be particularly important for family agribusinesses, which usually do not use sophisticated decision-making tools. An AP in an agrosilvopastoral system (i.e., agriculture, livestock, forestry) was used to present and discuss the proposed methodology considering the relevance of such systems for sustainable agriculture and their higher risk and complexity when compared to traditional approaches. The main contribution of the framework is structuring a set of steps based on several tools to carry out investment appraisal in APs.

Keywords: agricultural project; investment appraisal; risk analysis; extended multi-index methodology; Monte Carlo simulation; real options analysis (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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