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Uncertainty and Real Options. Investment and Development of Fishing Resources (II)

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  • Murillas Maza, Arantza

Abstract

[EN] The irreversibility of the investment expenditures in a fishery and the high degree of uncertainty attaching to the price of the fishing resources make the evaluation of investment opportunity in a fishery particularly difficult. The net-present-value proposes the following rule: "Invest in a project when the present value of its expected cash flows is at least as large as its cost". As the expenditures are largely irreversibles (sunk cost that cannot be recovered) and the fishing investment can be delayed, the previous rule is incorrect. Thus, in this paper it is used an option based approach to capital budgeting because under this technique management have valuable flexibility, giving the firm the opportunity to wait for new information to arrive about prices. The paper presents a model that determines when (at which price level) it is optimum for a firm invest in a fishery and what it is the value of the investment opportunity. The natural growth rate and production function of fishing resources are those of Shaefer model.

Suggested Citation

  • Murillas Maza, Arantza, 2000. "Uncertainty and Real Options. Investment and Development of Fishing Resources (II)," BILTOKI 1134-8984, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
    • Handle: RePEc:ehu:biltok:5843
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    File URL: https://addi.ehu.es/handle/10810/5843
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    References listed on IDEAS

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    6. McDonald, Robert L & Siegel, Daniel R, 1985. "Investment and the Valuation of Firms When There Is an Option to Shut Down," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 331-349, June.
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