Option Models Application of Investments in Organic Agriculture

Farmers constantly face decisions about whether to invest in a new production method with increased risks and uncertainties or to maintain the current system without new risks and uncertainties. The possible method to evaluate a new business or investment opportunity is to use traditional discounted cash flow methods [23, 24]. Investment assessment is the very important part of the capital operations and important perception for the success of invest‐ ment projects. Although the Net Present Value (NPVt) methodology is widely used by project decision making process, a disadvantage of the NPVt is that the method does not in‐ clude the flexibility or uncertainty. Several researchers argue that Net Present Value (NPVt) is not adequate under uncertain conditions and typically considers projects to be irreversible [1, 4, 8, 29]. To evaluate suitable investment possibilities, an investor-farmer needs to take into account the value of keeping options open, including the impact of sources of uncer‐ tainty and risk attitudes. The risk and uncertainty associated with management decisions are included in the formulation of real options problems [8, 30] and real option models [3]. However, real options approach (ROA) rise from the doubt of NPVt method and can make up for it in assessment investment agricultural projects.