Investment Decisions in Small Ethanol Plant under Risk and Uncertainty
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This study evaluates optimal investment decision rules for an energy beet ethanol firms to simultaneously exercise the option to invest, mothball, reactivate and exit the ethanol market, considering uncertainty and volatility in the market price of ethanol and irreversible investment. A real options framework is employed to compute the prices of ethanol that trigger entry into and exit from the ethanol market. Results show that hysteresis is found to be significant even with modest volatility in ethanol prices, implying that a small amount of uncertainty greatly impacts trigger entry and exit prices.