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INVESTMENT, IRREVERSIBILITY, AND UNCERTAINTY IN ENERGY BEET–BASED ETHANOL

  • KASSU WAMISHO HOSSISO (a1) and DAVID RIPPLINGER (a2)

Abstract:

This study evaluates optimal investment decision rules for an energy beet ethanol firm to exercise the option to invest, mothball, reactivate, and exit the ethanol market, considering uncertainty and volatility in the market price of ethanol, feedstock, and irreversible investment. A real options framework is used to compute gross margins of ethanol that trigger entry into and exit from the ethanol market. Results show that volatility in ethanol gross margins has much greater effects on exit and entry decisions than investment costs, and it also causes firms to wait longer before entering the ethanol market and, once active, to wait longer before exiting.

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Copyright

This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.

Corresponding author

*Corresponding author e-mail: kassu.hossiso@bea.gov

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Keywords

INVESTMENT, IRREVERSIBILITY, AND UNCERTAINTY IN ENERGY BEET–BASED ETHANOL

  • KASSU WAMISHO HOSSISO (a1) and DAVID RIPPLINGER (a2)

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