African Journal of
Agricultural Research

  • Abbreviation: Afr. J. Agric. Res.
  • Language: English
  • ISSN: 1991-637X
  • DOI: 10.5897/AJAR
  • Start Year: 2006
  • Published Articles: 6574

Full Length Research Paper

Assessment of potato processing investments by real options approach: Case study

Karmen Pažek*, Matej Kolenko, Jernej Turk, Jernej Prišenk, Andreja Borec, Martin Pavlovič and ÄŒrtomir Rozman
Faculty of Agriculture and Life Sciences, University of Maribor, Pivola 10, 2311 Hoče, Slovenia.
Email: [email protected]

  •  Accepted: 31 October 2013
  •  Published: 14 November 2013

Abstract

The paper presents the integrated technological-economic deterministic simulation system for decision-making support in agric-food production. An emphasis was made on the use of standard financial indicator net present value (NPVt) by incorporating the real options approach for potato processing as a supplementary activity on a mixed farm. The application of real options (RO) was presented using the Black-Scholes and binomial model. Different potato processing alternatives were assessed. The processed potato in cubes was shown as the alternative with the higher NPVt. For the potatoes processed into cubes, the option value (OV) is the highest value (105,860.90 € in Black-Scholes model and 105,324.42 € in the binominal model). Real options have an important value in decision management where standard methods of investment analysis are upgraded and taken into consideration with the stochastic elements as well.

Key words: Potato processing, simulation, standard net present value, option models.