Employing real options methodology in agricultural investments: the case of greenhouse construction

Abstract

The latest developments in investment analysis offer a number of valuable insights into how to evaluate investment opportunities encountering the weaknesses of net present value criterion. More specifically, irreversibility, uncertainty and the choice of timing are conditions that net present value does not include but they alter the investment decision in a determinant way. By employing contingent claims analysis in tangible investments better assessment results can be derived. In this work, an attempt is made to modify the NPV criterion by incorporating the real options approach, and its application is demonstrated in a greenhouse construction investment plan. A discounted cash flow approach indicates that the adoption of a new technology project under uncertainty is feasible while the real options approach differentiates the results. The corollary is that the real options approach can be proved useful when assessing projects with uncertainty and irreversibility and it can provide a new way of examining agricultural investment decisions.