Ethanol Plant Investment using Net Present Value and Real Options Analyses

Abstract

A real option analysis of dry-grind corn ethanol plants compared to a standard net present value analysis (NPV) shows that the option values increase entry prices and lower exit prices of investment and disinvestment considerably. For a large plant, the gross margin of ethanol price over the corn price for a gallon of ethanol using NPV shows that entry will occur with a $0.45 margin and shutdown will occur at a$0.38. Under a real options framework, the margins for entry and exit become $1.33 and$0.13, respectively. Under baseline conditions, a large operating plant would become mothballed at $0.18 and reactivate if margins rebounded to$0.66. Growth in the variability of ethanol margins will delay new plant investments, as well as exits of currently operating facilities.Ethanol, Net Present Value, Real Options Analyses, Environmental Economics and Policy, Financial Economics, Production Economics, Resource /Energy Economics and Policy, D21, D81, Q4,