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Sequential investment and delay: an agribusiness firm case study


  • Sameh Hachicha
  • Leila Kaaniche
  • Fathi Abid


Purpose - Investment decisions by agribusiness firms are costly and subject to high volatility and uncertainty. In many cases, the project value is not only determined by its cash-flows stream and financial side effects but also by the presence of substantial future uncertainty such as project implementation delay and growth opportunities. The purpose of this paper is to evaluate an agribusiness project taking into account these two options and to illustrate the how risks that evolve over time can affect sequential investment decisions in the oleic oil industry in Tunisia. Design/methodology/approach - The methodology used to capture the investment project value and analyze the impact of lags between the initial investment decision and its implementation on project value is based on a decision tree method and binomial lattice method (which adds growth option). The project valuation is based, first on actual data at the time of the initial decision and second the authors use the full information to report on the true value of the investment opportunity as real time evolved. Findings - Findings show that time to build is a very important factor in valuing an agribusiness especially when efficiency is strongly governed by climatic conditions and international market uncertainty. Our real options approach shows that production delays can deteriorate the follow-on project value by as much as 53 percent. The implicit growth option falls to only 27 percent of the total project value while it was about 58 percent according to the standard forecast. The delay in project implementation not only affects the firm project financing costs and the loss of revenue, but also it contributes to modify the initial marketing strategy. Originality/value - The paper is a first application of real option approach to the oleic oil industry. The methodology used in the paper can be adapted by practitioners and investors to adequately value oleic projects.

Suggested Citation

  • Sameh Hachicha & Leila Kaaniche & Fathi Abid, 2011. "Sequential investment and delay: an agribusiness firm case study," Agricultural Finance Review, Emerald Group Publishing, vol. 71(2), pages 240-258, August.
  • Handle: RePEc:eme:afrpps:v:71:y:2011:i:2:p:240-258

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    References listed on IDEAS

    1. Isik, Murat & Coble, Keith H. & Hudson, Darren & House, Lisa O., 2003. "A model of entry-exit decisions and capacity choice under demand uncertainty," Agricultural Economics of Agricultural Economists, International Association of Agricultural Economists, vol. 28(3), May.
    2. Majd, Saman & Pindyck, Robert S., 1987. "Time to build, option value, and investment decisions," Journal of Financial Economics, Elsevier, vol. 18(1), pages 7-27, March.
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    4. Pacheco-de-Almeida, Goncalo & Zemsky, Peter, 2003. " The Effect of Time-to-Build on Strategic Investment under Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 166-182, Spring.
    5. Engel, Phoebe D. & Hyde, Jeffrey, 2003. "A Real Options Approach To Investment Analysis Of Automatic Milking Systems," 2003 Annual meeting, July 27-30, Montreal, Canada 22216, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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    7. Engel, Phoebe D. & Hyde, Jeffrey, 2003. "A Real Options Analysis of Automatic Milking Systems," Agricultural and Resource Economics Review, Cambridge University Press, vol. 32(02), pages 282-294, October.
    8. Engel, Phoebe D. & Hyde, Jeffrey, 2003. "A Real Options Analysis of Automatic Milking Systems," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 32(2), October.
    9. Schmit, Todd M. & Luo, Jianchuan & Tauer, Loren W., 2008. "Ethanol Plant Investment using Net Present Value and Real Options Analyses," Working Papers 51145, Cornell University, Department of Applied Economics and Management.
    10. Petya Koeva Brooks, 2000. "The Facts About Time; To-Build," IMF Working Papers 00/138, International Monetary Fund.
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