PLUM PLANTATION VALUE BASED ON REAL OPTION CONTRIBUTION

Abstract

This paper is aimed to stress the modern methods of project value analysis based on valuation of opportunities emerged during the project’s life. Traditional appraisal methodology can hardly incorporate option value and quantify management flexibility. Therefore, traditional investment appraisal should be completed with option value evaluation (Real Option). The appliance of option quantification is showed on a model of plum and plum brandy production as an extension activity. Results of traditional NPV analysis for 1 ha of plum production imply to be unacceptable. On the other hand, economic analysis of extended plum brandy production indicates high profitability. It implies that plum plantation has an option calculated using Black-Scholes and Binomial model. Plum production strategic NPV that includes option value is in this case 2 950.54 EUR indicating acceptability of investment.

Keywords

• real option
• plum
• plum brandy