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A Socioeconomic Valuation of an Irrigation System Project Based on Real Option Analysis Approach

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  • Anastasios Michailidis
  • Konstadinos Mattas
  • Irene Tzouramani
  • Diamantis Karamouzis

Abstract

Traditional net present value methods used to evaluate potential projects make no allowance for flexibility and assume a static environment. The concept of real options has extended into irrigation systems to model design flexibility in the realistically uncertain environment. In particular, this article extends the evaluation techniques of an irrigation dam by combining the real options approach along with the traditional on (Discount Cash Flow). However, whereas financial options are well-defined traded contracts, real options in irrigation systems are a priori undefined, complex and interdependent. Moreover, irrigation systems involve many more options than designers could consider. Therefore designers need to identify the real options most likely to offer good flexibility and the most value. This paper demonstrates the ease that irrigation systems economic analysis with risk analysis and real options can be valued by simulation software that is readily available to owners of personal computers. Sequentially, Discount Cash Flow analysis accompanied with real options approach facilitates decision making and encourages more sophisticated and realistic economic analysis of irrigation systems. Copyright Springer Science+Business Media B.V. 2009

Suggested Citation

  • Anastasios Michailidis & Konstadinos Mattas & Irene Tzouramani & Diamantis Karamouzis, 2009. "A Socioeconomic Valuation of an Irrigation System Project Based on Real Option Analysis Approach," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 23(10), pages 1989-2001, August.
    • Handle: RePEc:spr:waterr:v:23:y:2009:i:10:p:1989-2001
    DOI: 10.1007/s11269-008-9364-3
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    Cited by:

    1. Christine Heumesser & Sabine Fuss & Jana Szolgayová & Franziska Strauss & Erwin Schmid, 2012. "Investment in Irrigation Systems under Precipitation Uncertainty," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 26(11), pages 3113-3137, September.
    2. Taeil Park & Changyoon Kim & Hyoungkwan Kim, 2014. "Valuation of Drainage Infrastructure Improvement Under Climate Change Using Real Options," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 28(2), pages 445-457, January.
    3. Qin Tu & Hong Li & Xinkun Wang & Chao Chen & Yin Luo & Frank Dwomoh, 2014. "Multi-Criteria Evaluation of Small-Scale Sprinkler Irrigation Systems Using Grey Relational Analysis," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 28(13), pages 4665-4684, October.
    4. Paydar, Z. & Qureshi, M.E., 2012. "Irrigation water management in uncertain conditions—Application of Modern Portfolio Theory," Agricultural Water Management, Elsevier, vol. 115(C), pages 47-54.
    5. Zuliang Lu & Xiankui Wu & Fei Cai & Fei Huang, 2021. "An Empirical Study for Real Options of Water Management in the Three Gorges Reservoir Area," Sustainability, MDPI, vol. 13(20), pages 1-16, October.
    6. Chen, Dan & Webber, Michael & Chen, Jing & Luo, Zhaohui, 2011. "Emergy evaluation perspectives of an irrigation improvement project proposal in China," Ecological Economics, Elsevier, vol. 70(11), pages 2154-2162, September.
    7. Byungil Kim & Kyle Anderson & SangHyun Lee & Hyoungkwan Kim, 2014. "A Real Option Perspective to Value the Multi-Stage Construction of Rainwater Harvesting Systems Reusing Septic Tank," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 28(8), pages 2279-2291, June.

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