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Abstract
An extension of the Guerrero et al. (2010) net present value (NPV) analysis using real options
analysis (ROA) is offered to improve machinery replacement decisions. Specifically, the feasibilities
of replacing natural gas irrigation systems with either electric or hybrid (electric/wind) systems
are evaluated. Results indicate NPVand ROA criteria can yield opposite decisions depending on the
stochastic nature of the parameters, reversibility of the investment, and flexibility of investment
timing. For policy, NPV results indicate that replacing natural gas with a hybrid is on the cusp of
being optimal. However, ROA indicates this NPV implication may not hold.