Sequential Investment and Delay: An Agribusiness Firm Case Study

Abstract

Investment decisions by agribusiness firms are costly and subject to high volatility and uncertainty. In many cases, the project value is not only determined by its cash-flows stream and financial side effects but also by the presence of substantial future uncertainty such as project implementation delay and growth opportunities. The purpose of this paper is to evaluate an agribusiness project taking into account these two options and to illustrate the how risks that evolve over time can affect sequential investment decisions in the oleic oil industry in Tunisia. The methodology used to capture the investment project value and analyze the impact of lags between the initial investment decision and its implementation on project value is based on a decision tree method and binomial lattice method (which adds growth option). The project valuation is based, first on actual data at the time of the initial decision and second we use the full information to report on the true value of the investment opportunity as real time evolved. Findings show that time-to-build is a very important factor in valuing an agribusiness especially when efficiency is strongly governed by climatic conditions and international market uncertainty. Our real options approach shows that production delays can deteriorate the follow-on project value by as much as 53%. The implicit growth option falls to only 27% of the total project value while it was about 58% according to the standard forecast. The Delay in project implementation not only affects the firm project financing costs and the loss of revenue, but also it contributes to modify the initial marketing strategy.