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Investment in a Methane Digester: An Application of Capital Budgeting and Real Options

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  • Jeffrey R. Stokes
  • Rekha M. Rajagopalan
  • Spiro E. Stefanou

Abstract

Methane digesters may offer dairy producers a way to lower production costs by becoming self-sufficient in electricity production. In addition, the technology may offer additional income through surplus electricity sales and fertilizer and bedding savings as well. However, the typical methane digester is a large and irreversible capital investment characterized by value uncertainty. Analyzed in a real option framework, the theory suggests a potential explanation for why producers in states like Pennsylvania require significant grant funding to adopt the technology, namely, as monetary compensation for the uncertainty in the value of the completed project. The study presents an empirical application. Copyright 2008, Oxford University Press.

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File URL: http://hdl.handle.net/10.1111/j.1467-9353.2008.00439.x
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Bibliographic Info

Article provided by Agricultural and Applied Economics Association in its journal Review of Agricultural Economics.

Volume (Year): 30 (2008)
Issue (Month): 4 ()
Pages: 664-676

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Handle: RePEc:oup:revage:v:30:y:2008:i:4:p:664-676

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Cited by:
  1. 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.
  2. DeVuyst, Eric A. & Pryor, Scott W. & Lardy, Greg & Eide, Wallace & Wiederholt, Ron, 2011. "Cattle, ethanol, and biogas: Does closing the loop make economic sense?," Agricultural Systems, Elsevier, vol. 104(8), pages 609-614, October.
  3. Gloy, Brent A., 2010. "Carbon Dioxide Offsets from Anaerobic Digestion of Dairy Waste," Working Papers 126750, Cornell University, Department of Applied Economics and Management.
  4. Leuer, Elizabeth R. & Hyde, Jeffrey & Richard, Tom L., 2008. "Investing in Methane Digesters on Pennsylvania Dairy Farms: Implication of Scale Economies and Environmental Programs," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 37(2), October.

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