An assessment of apple orchard investments in South Africa under uncertainty and irreversibility

• Main Authors: MAG Darroch, PA Hardman, GF Ortmann
• Format: Article
• Language: English
• Published: AOSIS 2004-11-01
• Series: South African Journal of Economic and Management Sciences
• Online Access: https://sajems.org/index.php/sajems/article/view/1292

The competitiveness of the South African fresh apple export value chain can be improved if local farmers grow and market more new apple cultivars. An ex ante version of the Dixit-Pindyck investment model is used to assess how uncertainty and irreversibility associated with adopting the new Pink Lady cultivar rather than a traditional Golden Delicious cultivar will raise the hurdle rate required to trigger investment. Modified real hurdle rates reflecting the value of the option to delay investment estimated for both cultivars, are about double the real rate of five per cent that is often used in orthodox investment analyses. The Pink Lady investment seems to be relatively more profitable under the assumed conditions, but it also has a relatively greater variance in expected real annual net returns.