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Investment Analysis In Agriculture

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  • Tauer, Loren W.

Abstract

Recent developments in investment analysis and their relevancy in agricultural investment assessment are discussed. The Net Present Value model can be modified to incorporate the value of strategic management of an investment into the initial evaluation of that investment. Since these decisions can be modeled as call and put options, the mathematics of financial options has been applied to these investment decisions, and referred to as real options analysis. It is shown how contingent claims analysis can be used to value these real options. Contingent claims analysis uses a risk-free discount rate, since risk is incorporated into option valuation using computed risk-neutral probabilities obtained from a replicating portfolio correlated to the discounted income stream. Many net returns in agricultural activities are correlated with prices of underlying agricultural commodities, suggesting the potential use of contingent claims analysis.

Suggested Citation

  • Tauer, Loren W., 2000. "Investment Analysis In Agriculture," Staff Papers 14763, Cornell University, Department of Applied Economics and Management.
  • Handle: RePEc:ags:cudasp:14763
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    File URL: http://purl.umn.edu/14763
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    References listed on IDEAS

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    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    2. Amy Purvis & William G. Boggess & Charles B. Moss & John Holt, 1995. "Technology Adoption Decisions under Irreversibility and Uncertainty: An Ex Ante Appproach," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(3), pages 541-551.
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    Cited by:

    1. Tomek, William G., 2000. "Commodity Prices Revisited," Staff Papers 121146, Cornell University, Department of Applied Economics and Management.
    2. Tauer, Loren W., 2000. "Estimating Risk-Adjusted Interest Rates for Dairy Farms," Staff Papers 121149, Cornell University, Department of Applied Economics and Management.
    3. Tomek, William G., 2000. "Commodity Prices Revisited," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 29(2), October.

    More about this item

    Keywords

    Agricultural Finance;

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