Including Risk in Economic Feasibility Analysis:a Stochastic Simulation Model for Blueberry Investment Decisions in Chile

Abstract

-The traditional method of net present value (NPV) to analyze the economic profitability of an investment (based on a deterministic approach) does not adequately represent the implicit risk associated with different but correlated input variables. Using a stochastic simulation approach for evaluating the profitability of blueberry (Vaccinium corymbosum L.) production in Chile, the objective of this study is to illustrate the complexity of including risk in economic feasibility analysis when the project is subject to several but correlated risks. The results of the simulation analysis suggest that the non-inclusion of the intratemporal correlation between input variables underestimate the risk associated with investment decisions. The methodological contribution of this study illustrates the complexity of the interrelationships between uncertain variables and their impact on the convenience of carrying out this type of business in Chile. The steps for the analysis of economic viability were: First, adjusted probability distributions for stochastic input variables (SIV) were simulated and validated. Second, the random values of SIV were used to calculate random values of variables such as production, revenues, costs, depreciation, taxes and net cash flows. Third, the complete stochastic model was simulated with 10,000 iterations using random values for SIV. This result gave information to estimate the probability distributions of the stochastic output variables (SOV) such as the net present value, internal rate of return, value at risk, average cost of production, contribution margin and return on capital. Fourth, the complete stochastic model simulation results were used to analyze alternative scenarios and provide the results to decision makers in the form of probabilities, probability distributions, and for the SOV probabilistic forecasts. The main conclusion shown that this project is a profitable alternative investment in fruit trees in Chile. Index terms: Random values, value at risk, probabilistic forecasts. INCLUYENDO EL RIESGO EN EL ANÁLISIS DE VIABILIDAD ECONÓMICA: UN MODELO DE SIMULACIÓN ESTOCÁSTICA PARA DECISIONES DE INVERSIÓN EN ARÁNDANOS EN CHILERESUMEN -El método tradicional de valor presente neto (VPN) que se utiliza para evaluar la rentabilidad económica de una inversión no representa adecuadamente el riesgo implícito asociado a diferentes variables de entrada cuando entre ellas se encuentran correlacionadas. Utilizando un enfoque de simulación estocástica para evaluar la rentabilidad del arándano (Vaccinium corymbosum L.) en Chile, el objetivo de este trabajo es ilustrar cuán compleja se torna la evaluación económica cuando la rentabilidad del proyecto depende de variados riesgos que se encuentran correlacionados. Los resultados del análisis de simulación sugieren que no incluir la correlación intra-temporal entre las variables de entrada lleva a subestimar el riesgo de inversión. La innovación metodológica de este trabajo ilustra la complejidad de las interrelaciones entre variables inc...

Costs and financial viability of blueberry production in Pelotas

“…Finally, the sum of fixed and variable costs results in the total costs. In general, agricultural markets are highly volatile due to the prices paid for inputs (Lobos et al, 2015). As a result of this, the economic conditions and profitability of agricultural investments can vary considerably.…”