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Investment in a Methane Digester: An Application of Capital Budgeting and Real Options
Author(s) -
Stokes Jeffrey R.,
Rajagopalan Rekha M.,
Stefanou Spiro E.
Publication year - 2008
Publication title -
applied economic perspectives and policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.4
H-Index - 49
eISSN - 2040-5804
pISSN - 2040-5790
DOI - 10.1111/j.1467-9353.2008.00439.x
Subject(s) - capital investment , methane , capital budgeting , investment (military) , capital (architecture) , business , capital expenditure , economics , natural resource economics , environmental science , finance , chemistry , geography , archaeology , project appraisal , politics , political science , law , organic chemistry
Methane digesters may offer dairy producers a way to lower production costs by becoming self‐sufficient in electricity production. In addition, the technology may offer additional income through surplus electricity sales and fertilizer and bedding savings as well. However, the typical methane digester is a large and irreversible capital investment characterized by value uncertainty. Analyzed in a real option framework, the theory suggests a potential explanation for why producers in states like Pennsylvania require significant grant funding to adopt the technology, namely, as monetary compensation for the uncertainty in the value of the completed project. The study presents an empirical application.