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A Real Options Analysis of Automatic Milking Systems

Published online by Cambridge University Press:  15 September 2016

Phoebe D. Engel  and
Jeffrey Hyde
Phoebe D. Engel
Affiliation:
Bunge Global Markets Department of Agricultural Economics and Rural Sociology, The Pennsylvania State University
Jeffrey Hyde
Affiliation:
Department of Agricultural Economics and Rural Sociology, The Pennsylvania State University
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Abstract

Automatic, or robotic, milking systems have the potential to significantly change the way milk is produced on U.S. dairy farms. However, there is a high degree of uncertainty associated with adoption of this new technology. A real options approach is used to analyze the decision to replace an operational milking system with an automatic milking system. The most important source of uncertainty is shown to be the length of the technology's useful life. Under our assumptions, the automatic system is always an optimal investment if it is certain that it will last longer than the operational system being replaced.

Keywords

automatic milking systemcapital budgetingnet present valuereal optionsrobotic milking system
Type
Articles
Information
Agricultural and Resource Economics Review , Volume 32 , Issue 2 , October 2003 , pp. 282 - 294
Copyright
Copyright © 2003 Northeastern Agricultural and Resource Economics Association 

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