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

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  • Byungil Kim
  • Kyle Anderson
  • SangHyun Lee
  • Hyoungkwan Kim

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

Suggested Citation

  • 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.
    • Handle: RePEc:spr:waterr:v:28:y:2014:i:8:p:2279-2291
    DOI: 10.1007/s11269-014-0613-3
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    References listed on IDEAS

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    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.
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    5. Taeil Park & Byungil Kim & Hyoungkwan Kim, 2012. "Impact of Deterioration and Negotiation on Sewer System O&M Contracts from the Real Option Perspective," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 26(10), pages 2973-2989, August.
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    Cited by:

    1. Gabriela Cristina Ribeiro Pacheco & Marcus André Siqueira Campos, 2019. "Real Options Analysis as an Economic Evaluation Method for Rainwater Harvesting Systems," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 33(12), pages 4401-4415, September.
    2. Gabriela Cristina Ribeiro Pacheco & Conceição de Maria Albuquerque Alves, 2023. "The Influence of Deep Uncertainties in the Design and Performance of Residential Rainwater Harvesting Systems," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 37(4), pages 1499-1517, March.
    3. Polat, Levent & Battal, Unal (Ãœnal), 2021. "Airport infrastructure investments and valuing expansion decisions using the compound real option approach," Journal of Air Transport Management, Elsevier, vol. 91(C).
    4. Okoye, Chiemeka Onyeka & Solyalı, Oğuz & Akıntuğ, Bertuğ, 2015. "Optimal sizing of storage tanks in domestic rainwater harvesting systems: A linear programming approach," Resources, Conservation & Recycling, Elsevier, vol. 104(PA), pages 131-140.

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