Real options under technological uncertainty: A case study of investment in a post-smolt facility in Norway

This paper evaluates the optimal timing to undertake an investment in a post-smolt production facility under both profit and technology uncertainty, using a real options approach. Two multi-factor stochastic models are developed to distinguish between the technological innovations that reduce the investment cost and increase the efficiency of the production process. The results indicate that by relying on traditional capital budgeting methods the salmon farming companies may undervalue sensible investment opportunities, such as post-smolt production. Additionally, it is show that the investment strategy of the salmon farming company is greatly influenced by the way the benefits of the technological innovations affect the firm. A farmer has stronger incentives to delay investment when the expected benefits of technological innovations are associated with the future investment cost reduction.