A Real Option Perspective to Value the Multi-Stage Construction of Rainwater Harvesting Systems Reusing Septic Tank

Byungil Kim (), Kyle Anderson (), SangHyun Lee () and Hyoungkwan Kim ()

Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), 2014, vol. 28, issue 8, 2279-2291

Abstract: Recently, rainwater harvesting systems have received increased attention due to their capability for adapting to water scarcity and climate change. However, a key obstacle to the implementation of rainwater harvesting systems is that they are often not financially feasible given difficulty in determining optimal system size. A key premise of previous studies was that all rainwater harvesting systems are constructed in a single construction event even though it is possible to construct a system in multiple stages. This assumption limits managerial flexibility in the construction of rainwater harvesting systems, which is particularly valuable in scenarios where it is difficult to forecast future rainfall patterns. Therefore, we propose a multi-stage system expansion strategy for the implementation of rainwater harvesting systems using decommissioned septic tanks under scenarios of uncertainty in rainfall from a real option perspective as a means to improve the financial feasibility of implementing rainwater harvesting systems. We tested this strategy by evaluating a proposed rainwater harvesting system for a midsize apartment complex in Jeonju, South Korea. The multi-stage expansion strategy generated an option value of 9,896 USD. This study will help to improve the financial feasibility of rainwater harvesting systems by adding the value of managerial flexibility through a sequential expansion of RWH systems as new information becomes available. Copyright Springer Science+Business Media Dordrecht 2014

Keywords: Rainwater harvesting; Septic tank; Real option; Climate change (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s11269-014-0613-3

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