| The application of financial option theory to the valuation of capital projects is termed the real options approach. The purpose of this study is to determine the applicability of the real options approach to valuing investments in agriculture. Specifically, the study developed an NPV and real options models to evaluate a farrow-to-finish pork investment.; Although the NPV analysis rejected the hog project evaluated, the value of the project improved when the managerial options were considered. Particularly, the option to wait was highly valuable for this investment. However, if the expected average price of finished hog increased by between 23%--29%, it would be economically sensible for management to invest immediately. The sensitivity analyses indicate that the NPV and the real option results are sensitive to the discount rate and the volatility respectively. The results of the option analysis closely matched the actual decision of the management of the case studied. |
