Real options financial analysis for the application of solid rain: the case of avocado in Michoacan

Abstract

The objective of this study was to perform a financial analysis of the use of solid rain (potassium polyacrylate)
with the real options method, to deal with price volatility and water scarcity for avocado production (Persea
americana Mill.) in the state of Michoacán. The analysis is based on field data for extensive farming and a
financial evaluation to decide the most convenient, economic, social and environmentally sustainable option
for the project. The results from the study indicate that the incorporation of the polymer increased the
efficiency in water use by 50%, decreased costs by 65%, and increased agricultural productivity by 30%. The
cash flow (CF) at present value of the project with the option of investing in this technology is $3,261,608.13
and without the option it is $3,000,200.00. The Net Present Value (NPV) changes to $1,726,526.50, which
elevates the value of the project by $57,326.50, so that the hypothesis of financial viability of the project is
proven. The study concludes that it is possible to increase the profitability in the cultivation of avocado with
the use of solid rain, in order to deal with water scarcity and price volatility in the study period.