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Abstract
Many investment decisions of agribusiness firms, such as when to invest in an emerging market or whether to expand
the capacity of the firm, involve irreversible investment and uncertainty about demand, cost or competition. This paper uses
an option-value model to examine the factors affecting an agribusiness firm's decision whether and how much to invest in
an emerging market under demand uncertainty. Demand uncertainty and irreversibility of investment make investment less
desirable than the net present value (NPV) rule indicates. The inactive firm is more reluctant to enter the market when it takes
into account demand uncertainty because it preserves the opportunity of making a better investment later. The active firm is
more reluctant to abandon the investment because there is an option value of keeping the operation alive. There is a greater
distance between the entry and exit thresholds under the option-value approach than under the NPV rule due to demand
uncertainty. The results have implications for agribusiness decision-making.
© 2003 Elsevier Science B.V. All rights reserved.