The Use of Real Options Methodology to Pasturelands Evaluation

Abstract

This study demonstrates the utility of the real options approach to pasturelands investment analysis. The main objectives are to discuss the real options theory and show how it can be adopted to model uncertainty and managerial flexibility in pasture management (enlargement plan) and investment. Secondly, we show how to calculate the option values of selected options that may be available to managers of pasturelands. The study provides an empirical application, which compares a pasture investment using the static Net Present Value model and real options approach. The results show that according to the Net Present Value criterion, the enlargement plan of the pastureland is economically feasible. However, assuming the presence of uncertainty, application of a real options approach demonstrates that the Net Present Value may lead stakeholders to faulty decisions, as the investment plan is rejected.