Employing Real Options Methodology for Decision Making in Greenhouse Technology

Irene Tzouramani and Konstadinos Mattas

No 24835, 2002 International Congress, August 28-31, 2002, Zaragoza, Spain from European Association of Agricultural Economists

Abstract: Latest developments in investment analysis offer a number of valuable insights into how to evaluate investment opportunities encountering the weaknesses of net present value criterion. More specific, irreversibility, uncertainty and the choice of timing are conditions that net present value does not include but they alter the investment decision in critical way. Employing contingent claims analysis in tangible investments several assumptions made by discount cash flow method are concerned and better assessment results can be derived. In this work, an attempt is made to apply real options methodology in agricultural investments. Many agricultural investors face a growing uncertainty environment with high sunk investments and net present value criterion has been extensively used that may be lead to incorrect decisions. Both discount cash flow method and real options approach are employed to evaluate the effectiveness of a new technology project under uncertainty returns in agriculture. Discount cash flow approach indicates that the adoption of a new technology project under uncertainty is feasible while real options approach differentiates the results. The corollary is that real options approach can be proved conducive in assessing projects with uncertainty and irreversibility and it can furnish a new way of examining agricultural investment decisions.

Keywords: Crop; Production/Industries (search for similar items in EconPapers)
Pages: 13
Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:ags:eaae02:24835

DOI: 10.22004/ag.econ.24835

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