Location of an agribusiness enterprise with respect to economic viability: a risk analysis

This study analyzes the economic and geographic effects of alternative locationson risky investment decisions in a probabilistic framework. Historically, alternativelocations for multi-million dollar investments are often evaluated with deterministicmodels that rely on expected values or best case/worst case scenarios. Stochasticsimulation was used to estimate the probability distribution for select key outputvariables, including net present value (NPV), of a proposed biomass to ethanolproduction facility in three alternative regions in Texas.The simulated NPV probability distributions were compared using StochasticEfficiency with Respect to a Function (SERF) to predict the location preference ofdecision makers with alternative levels of risk aversion. Risk associated with inputavailability and costs were analyzed for the proposed plant locations so each locationresulted in different levels of economic viability and risk that would not have beenobserved with a traditional deterministic analysis.For all analyzed scenarios, the projected financial feasibility results show apositive NPV over the 16 year planning horizon with a small probability of beingnegative. The SERF results indicate the Central Region of Texas is preferred for riskaverse decision makers compared to the Panhandle and Coastal Bend Regions. Riskpremiums were calculated for the alternative locations and are consistent for all riskaverse decision makers, indicating the ranking of alternative locations are robust.Positive community impacts and sensitivity elasticities for key variables wereestimated in the model. The estimated positive economic gains for the local economyare quite large and indicate locating a production facility in the region couldsubstantially impact the local economy. The calculated sensitivity elasticities showethanol price, ethanol yield, and hydrogen price are the three variables that have thegreatest affect on the feasibility of a biomass to ethanol production facility.