A valuation of a corn ethanol plant through a compound options model under skew-Brownian motions

In the last decades, the production of fuel ethanol from corn has spread as a valid renewable alternative to pursue sustainability goals. How- ever the uncertain nature of both input (corn) and output (gasoline) prices, together with price dependent operational decisions, combine to make this dif- ficult plant valuation require a real options approach. Moreover, this project is characterized by various sequential stages that contribute to increase its valu- ation difficulties. The purpose of this paper is to provide a reliable valuation methodology of a corn ethanol plant project able to consider the characteris- tics of the project. We apply the compound Real Options Approach (ROA) to price a corn ethanol plant project considering that the corn and gasoline prices both follow a skew-geometric Brownian motion. We also propose a case study to show a real implementation of our theoretical model. The results show that the corn ethanol plant is financially attractive as renewable investment since the uncertainties inherent in the project add value, via managerial flexibility, to the real option valuation.