Investment analysis of deferring a farmer owned ethanol plant: using real options
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The Department of Economic Science was founded in 1898 to teach economic theory as a truth of industrial life, and was very much concerned with applying economics to business and industry, particularly agriculture. Between 1910 and 1967 it showed the growing influence of other social studies, such as sociology, history, and political science. Today it encompasses the majors of Agricultural Business (preparing for agricultural finance and management), Business Economics, and Economics (for advanced studies in business or economics or for careers in financing, management, insurance, etc).
History
The Department of Economic Science was founded in 1898 under the Division of Industrial Science (later College of Liberal Arts and Sciences); it became co-directed by the Division of Agriculture in 1919. In 1910 it became the Department of Economics and Political Science. In 1913 it became the Department of Applied Economics and Social Science; in 1924 it became the Department of Economics, History, and Sociology; in 1931 it became the Department of Economics and Sociology. In 1967 it became the Department of Economics, and in 2007 it became co-directed by the Colleges of Agriculture and Life Sciences, Liberal Arts and Sciences, and Business.
Dates of Existence
1898–present
Historical Names
- Department of Economic Science (1898–1910)
- Department of Economics and Political Science (1910-1913)
- Department of Applied Economics and Social Science (1913–1924)
- Department of Economics, History and Sociology (1924–1931)
- Department of Economics and Sociology (1931–1967)
Related Units
- College of Agricultural and Life Sciences (parent college)
- College of Liberal Arts and Sciences (parent college)
- College of Business (parent college)
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Abstract
A farmers owned value-added (FOVA) business is often subject to changes in the political situations. So an investment analysis tool that incorporates uncertainty, such as real options is more appropriate. Application of real options is limited in FOVA businesses. In this thesis, the concept of real options is applied under the framework of a farmer owned ethanol plant. The impact of changes in the policy or political situations on ethanol industry is well known. Farmer investors that are currently interested in investing in an ethanol plant should decide whether it is worthwhile to invest now or wait for a year to understand the status of the Renewable Fuels Standard, a major pending policy. In order to make a decision, option values are estimated over a one year period using explicit finite difference method. The findings suggest that the option value is more than the net present value of the ethanol plant. Hence it is worthwhile to wait for one more year.