Economic flexibilities and opportunities for sugar cane plants: A real options valuation case

Abstract

The goal of this paper is to investigate the effect of production flexibility in decision making in a sugar cane plant under the Real Options theory approach. It was considered a sugar cane plant with the option to switch output and with the option to temporary shutdown. Under these conditions, we sought to quantify the marginal effect of such flexibilities on the decision-making. The methodology employs Monte Carlo simulations to estimate the effect of options in the investment's value. The results obtained indicate that decision-making models with flexibilities can increase the expected value of the Net Present Value by up to 88.14 % and reduce the risk of Net Present Value being negative, especially when considering the temporary shutdown option. Finally, this paper proposes that flexibilities bring greater returns to sugar cane plants, allowing to mitigate the effects of crises in the sector.