IDEAS home Printed from https://ideas.repec.org/a/spr/waterr/v23y2009i10p1989-2001.html
   My bibliography  Save this article

A Socioeconomic Valuation of an Irrigation System Project Based on Real Option Analysis Approach

Author

Listed:
  • Anastasios Michailidis
  • Konstadinos Mattas
  • Irene Tzouramani
  • Diamantis Karamouzis

Abstract

Traditional net present value methods used to evaluate potential projects make no allowance for flexibility and assume a static environment. The concept of real options has extended into irrigation systems to model design flexibility in the realistically uncertain environment. In particular, this article extends the evaluation techniques of an irrigation dam by combining the real options approach along with the traditional on (Discount Cash Flow). However, whereas financial options are well-defined traded contracts, real options in irrigation systems are a priori undefined, complex and interdependent. Moreover, irrigation systems involve many more options than designers could consider. Therefore designers need to identify the real options most likely to offer good flexibility and the most value. This paper demonstrates the ease that irrigation systems economic analysis with risk analysis and real options can be valued by simulation software that is readily available to owners of personal computers. Sequentially, Discount Cash Flow analysis accompanied with real options approach facilitates decision making and encourages more sophisticated and realistic economic analysis of irrigation systems. Copyright Springer Science+Business Media B.V. 2009

Suggested Citation

  • Anastasios Michailidis & Konstadinos Mattas & Irene Tzouramani & Diamantis Karamouzis, 2009. "A Socioeconomic Valuation of an Irrigation System Project Based on Real Option Analysis Approach," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 23(10), pages 1989-2001, August.
    • Handle: RePEc:spr:waterr:v:23:y:2009:i:10:p:1989-2001
    DOI: 10.1007/s11269-008-9364-3
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11269-008-9364-3
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11269-008-9364-3?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1992. "Waiting to Invest: Investment and Uncertainty," The Journal of Business, University of Chicago Press, vol. 65(1), pages 1-29, January.
    2. Kassar, Ilhem & Lasserre, Pierre, 2004. "Species preservation and biodiversity value: a real options approach," Journal of Environmental Economics and Management, Elsevier, vol. 48(2), pages 857-879, September.
    3. Michel Demers, 1991. "Investment under Uncertainty, Irreversibility and the Arrival of Information Over Time," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 333-350.
    4. Louberge, Henri & Villeneuve, Stephane & Chesney, Marc, 2002. "Long-term risk management of nuclear waste: a real options approach," Journal of Economic Dynamics and Control, Elsevier, vol. 27(1), pages 157-180, November.
    5. B. Panigrahi & Sudhindra Panda & A. Agrawal, 2005. "Water Balance Simulation and Economic Analysis for Optimal Size of On-Farm Reservoir," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 19(3), pages 233-250, June.
    6. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-1148, September.
    7. Morck, Randall & Schwartz, Eduardo & Stangeland, David, 1989. "The Valuation of Forestry Resources under Stochastic Prices and Inventories," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(4), pages 473-487, December.
    8. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    9. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    10. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
    11. Janis M. Carey & David Zilberman, 2002. "A Model of Investment under Uncertainty: Modern Irrigation Technology and Emerging Markets in Water," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(1), pages 171-183.
    12. Anastasios Michailidis & Konstadinos Mattas, 2007. "Using Real Options Theory to Irrigation Dam Investment Analysis: An Application of Binomial Option Pricing Model," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 21(10), pages 1717-1733, October.
    13. Cuihong Yang & Xikang Chen & Jian Xu, 2008. "A Method to Optimize Gross Fixed Capital Investments for Water Conservancy in China," Economic Systems Research, Taylor & Francis Journals, vol. 20(2), pages 151-172.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Byungil Kim & Kyle Anderson & SangHyun Lee & Hyoungkwan Kim, 2014. "A Real Option Perspective to Value the Multi-Stage Construction of Rainwater Harvesting Systems Reusing Septic Tank," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 28(8), pages 2279-2291, June.
    2. Taeil Park & Changyoon Kim & Hyoungkwan Kim, 2014. "Valuation of Drainage Infrastructure Improvement Under Climate Change Using Real Options," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 28(2), pages 445-457, January.
    3. Qin Tu & Hong Li & Xinkun Wang & Chao Chen & Yin Luo & Frank Dwomoh, 2014. "Multi-Criteria Evaluation of Small-Scale Sprinkler Irrigation Systems Using Grey Relational Analysis," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 28(13), pages 4665-4684, October.
    4. Paydar, Z. & Qureshi, M.E., 2012. "Irrigation water management in uncertain conditions—Application of Modern Portfolio Theory," Agricultural Water Management, Elsevier, vol. 115(C), pages 47-54.
    5. Zuliang Lu & Xiankui Wu & Fei Cai & Fei Huang, 2021. "An Empirical Study for Real Options of Water Management in the Three Gorges Reservoir Area," Sustainability, MDPI, vol. 13(20), pages 1-16, October.
    6. Chen, Dan & Webber, Michael & Chen, Jing & Luo, Zhaohui, 2011. "Emergy evaluation perspectives of an irrigation improvement project proposal in China," Ecological Economics, Elsevier, vol. 70(11), pages 2154-2162, September.
    7. Christine Heumesser & Sabine Fuss & Jana Szolgayová & Franziska Strauss & Erwin Schmid, 2012. "Investment in Irrigation Systems under Precipitation Uncertainty," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 26(11), pages 3113-3137, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Anastasios Michailidis & Konstadinos Mattas, 2007. "Using Real Options Theory to Irrigation Dam Investment Analysis: An Application of Binomial Option Pricing Model," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 21(10), pages 1717-1733, October.
    2. Tzouramani, Irene & Mattas, Konstadinos, 2002. "Employing Real Options Methodology for Decision Making in Greenhouse Technology," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24835, European Association of Agricultural Economists.
    3. Lander, Diane M. & Pinches, George E., 1998. "Challenges to the Practical Implementation of Modeling and Valuing Real Options," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 537-567.
    4. Bellalah, Mondher, 2016. "Issues in real options with shadow costs of incomplete information and short sales," The Journal of Economic Asymmetries, Elsevier, vol. 13(C), pages 45-56.
    5. Ben Abdallah, Skander & Lasserre, Pierre, 2016. "Asset retirement with infinitely repeated alternative replacements: Harvest age and species choice in forestry," Journal of Economic Dynamics and Control, Elsevier, vol. 70(C), pages 144-164.
    6. Panagiotidis, Theodore & Printzis, Panagiotis, 2020. "What is the investment loss due to uncertainty?," Global Finance Journal, Elsevier, vol. 45(C).
    7. Yu, Jing & Xu, Bin, 2011. "The game analyses to price the target enterprise of merger and acquisition based on the perspective of real options under stochastic surroundings," Economic Modelling, Elsevier, vol. 28(4), pages 1587-1594, July.
    8. Gabriel P. Mathy, 2020. "How much did uncertainty shocks matter in the Great Depression?," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 14(2), pages 283-323, May.
    9. Sandri, Serena & Schade, Christian & Mußhoff, Oliver & Odening, Martin, 2010. "Holding on for too long? An experimental study on inertia in entrepreneurs' and non-entrepreneurs' disinvestment choices," Journal of Economic Behavior & Organization, Elsevier, vol. 76(1), pages 30-44, October.
    10. Lima, Dmitry & Colson, Gregory & Karali, Berna & Guerrero, Bridget & Amosson, Stephen & Wetzstein, Michael, 2013. "A New Look at the Economic Evaluation of Wind Energy as an Alternative to Electric and Natural Gas-Powered Irrigation," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 45(4), pages 739-751, November.
    11. repec:dau:papers:123456789/1046 is not listed on IDEAS
    12. Twine, Edgar E. & Omore, Amos & Githinji, Julius, 2018. "Uncertainty in milk production by smallholders in Tanzania and its implications for investment," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association, vol. 21(1).
    13. Wang, Tan, 2001. "Equilibrium with new investment opportunities," Journal of Economic Dynamics and Control, Elsevier, vol. 25(11), pages 1751-1773, November.
    14. Luis H. R. Alvarez & Erkki Koskela, 2006. "Irreversible Investment under Interest Rate Variability: Some Generalizations," The Journal of Business, University of Chicago Press, vol. 79(2), pages 623-644, March.
    15. Schenker, Oliver, 2011. "How uncertainty reduces greenhouse gas emissions," MPRA Paper 29591, University Library of Munich, Germany.
    16. Rainer Niemann & Caren Sureth, 2002. "Taxation under Uncertainty – Problems of Dynamic Programming and Contingent Claims Analysis in Real Option Theory," CESifo Working Paper Series 709, CESifo.
    17. Felipe Isaza Cuervo & Sergio Botero Boterob, 2014. "Aplicación de las opciones reales en la toma de decisiones en los mercados de electricidad," Estudios Gerenciales, Universidad Icesi, November.
    18. Jérôme Bourdieu & Benoît Coeuré & Béatrice Sédillot, 1997. "Investissement, incertitude et irréversibilité. Quelques développements récents de la théorie de l'investissement," Revue Économique, Programme National Persée, vol. 48(1), pages 23-53.
    19. Episcopos, Athanasios, 1995. "Evidence on the relationship between uncertainty and irreversible investment," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(1), pages 41-52.
    20. Luis H. R. Alvarez & Erkki Koskela, 2002. "Irreversible Investment under Interest Rate Variability: New Results," CESifo Working Paper Series 640, CESifo.
    21. repec:dau:papers:123456789/3018 is not listed on IDEAS
    22. Gjolberg, Ole & Guttormsen, Atle G., 2002. "Real options in the forest: what if prices are mean-reverting?," Forest Policy and Economics, Elsevier, vol. 4(1), pages 13-20, May.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:waterr:v:23:y:2009:i:10:p:1989-2001. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.