Evaluating an Investment Opportunity Under Risk and Uncertainty Environment: A Case Study About Profitability and Risk in Desert Farming at Najed Area

Fodder is continuously cultivated in coastal area of Salalah and Batinah region of Sultanate of Oman. However, this created a negative impact on the overall agriculture system and producti­on. The government authority stopped the cultivation of Rhodes grass in coastal area and support farmers with incentive systems in order to increase fodder production investment at Najed area. Due to irrigation water policy regulations, new technical solutions required, underground water availability, fodder investors have little data to help in making investment decisions. In addition, fodder production investments are characterized by much uncertainty due to the nature of the desert farming which is relying on many factors that cannot be controlled. In this paper a dynamic evaluation model was formed and developed as a method of analyzing the economic feasibility of fodder cultivation investment project with regard to project profitability under risk environment. Economic feasibility of the investment is evaluated through calculation of the Net Present Value and IRR by using Monte Carlo Simulation models. Our objective is to formulate a dynamic programming simulation model for the investment decision with incorporating this uncertainty in a probabilistic manner. Our simulation model result shows that the dynamic models are able to help investors and policy makers in taking optimum investment decision. Taking the risk into account leads to a significant decrease of the economic attractiveness of stakeholders and more Government support is needed to achieve water policy objectives and project sustainability at new developed area at Najed.