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The value of switching inputs in a biodiesel production plant
Authors:Luiz Eduardo T Brandão  Gilberto Master Penedo  Carlos Bastian-Pinto
Institution:1. Pontifícia Universidade Católica do Rio de Janeiro , Rio de Janeiro brandao@iag.puc-rio.br;3. Banco Itaú S.A, Rio de Janeiro;4. Universidade do Grande Rio - Unigranrio , Rio de Janeiro
Abstract:There has been a growing concern in recent years about the quality of the environment and dependence on fossil fuels to supply the world's energy needs, which has created an interest in the development of renewable and less polluting energy sources. One of these alternatives is the biodiesel fuel, which has many advantages over the fossil based diesel, or petro diesel. In this paper we use the real options approach to determine the value of the managerial flexibility embedded in a biodiesel plant that has the option to switch inputs among two different grain commodities. Our results indicate that the option to choose inputs has significant value if we assume that future prices follow stochastic processes such as Geometric Brownian Motion and Mean Reversion Models, and can be sufficient to recommend the use of input commodities that would not be optimal under traditional valuation methods. We also show that the choice of model and parameters has a significant impact on the valuation of this class of projects.
Keywords:biodiesel  real options  Monte Carlo simulation  mean reverting models
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