Lau, Michael H. (2004-12). Location of an agribusiness enterprise with respect to economic viability: a risk analysis. Doctoral Dissertation.
This study analyzes the economic and geographic effects of alternative locations
on risky investment decisions in a probabilistic framework. Historically, alternative
locations for multi-million dollar investments are often evaluated with deterministic
models that rely on expected values or best case/worst case scenarios. Stochastic
simulation was used to estimate the probability distribution for select key output
variables, including net present value (NPV), of a proposed biomass to ethanol
production facility in three alternative regions in Texas.
The simulated NPV probability distributions were compared using Stochastic
Efficiency with Respect to a Function (SERF) to predict the location preference of
decision makers with alternative levels of risk aversion. Risk associated with input
availability and costs were analyzed for the proposed plant locations so each location
resulted in different levels of economic viability and risk that would not have been
observed with a traditional deterministic analysis.
For all analyzed scenarios, the projected financial feasibility results show a
positive NPV over the 16 year planning horizon with a small probability of being
negative. The SERF results indicate the Central Region of Texas is preferred for risk
averse decision makers compared to the Panhandle and Coastal Bend Regions. Risk
premiums were calculated for the alternative locations and are consistent for all risk
averse decision makers, indicating the ranking of alternative locations are robust.
Positive community impacts and sensitivity elasticities for key variables were
estimated in the model. The estimated positive economic gains for the local economy
are quite large and indicate locating a production facility in the region could
substantially impact the local economy. The calculated sensitivity elasticities show
ethanol price, ethanol yield, and hydrogen price are the three variables that have the
greatest affect on the feasibility of a biomass to ethanol production facility.