Lau, Michael H. (2004-12). Location of an agribusiness enterprise with respect to economic viability: a risk analysis. Doctoral Dissertation. Thesis uri icon


  • 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.

publication date

  • December 2004