Using real options to evaluate ethanol plant expansion decisions
AbstractPurpose – The purpose of this paper is to investigate how to incorporate market price risk into investment decisions. The investigation focuses on investments to expand ethanol production facilities. The model is used to determine if such a real option approach can explain recent changes in the level of plant investment activity. Design/methodology/approach – The paper demonstrates how real option analysis and Monte Carlo simulation can be used to evaluate ethanol plant investments by using available historical industry and market price data. We focus on existing small-to-medium, dry milling plants and the real option to expand the scale of operations. The binomial option pricing model is used to identify optimal strategies. Findings – Increasing profitability and volatility appear to favor the strategy of investing during 2005-2007. However, when the prices of corn and natural gas rise and plant profitability declines during 2007-2008, the best strategy is increasingly to either postpone the investment or reject the decision to expand. Originality/value – This paper is a first application of real option analysis to ethanol plant expansion decisions. The methodology used in the paper can be adapted by analysts, investors, and lenders in the ethanol industry to improve their investment analyses.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Emerald Group Publishing in its journal Agricultural Finance Review.
Volume (Year): 69 (2009)
Issue (Month): 1 (May)
Contact details of provider:
Web page: http://www.emeraldinsight.com
Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Tubetov, Dulat & Maart, Syster Christin & Musshoff, Oliver, 2012.
"Comparison of the investment behavior of Kazakhstani and German farmers: An experimental approach,"
2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil
125218, International Association of Agricultural Economists.
- Tubetov, Dulat & Maart, Syster Christin & Musshoff, Oliver, 2012. "Comparison of the investment behavior of Kazakhstani and German farmers: An experimental approach," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124650, Agricultural and Applied Economics Association.
- Calum G. Turvey, 2010. "Biography: Kiyosi Itô and his influence on the study of agricultural finance and economics," Agricultural Finance Review, Emerald Group Publishing, vol. 70(1), pages 5-20, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Harris).
If references are entirely missing, you can add them using this form.