Technology selection—the impact of economic risk on decision making

ABSTRACT

Developing an understanding of economic variance (risk) is critical when evaluating alternative aquaculture production technologies. This article assesses the efficacy of employing a quantitative stochastic analysis technique to support technology selection decision making by undertaking a case study investment assessment of three alternative production expansion strategies (offshore sea-pens, land-based RAS growout and larger post-smolt) for the Tasmanian salmon industry. Results demonstrate that salmon aquaculture is undertaken with considerable underlying levels of economic risk, expansion offshore probably represents the lowest initial capital investment and greatest economic return, and that levels of financial uncertainty increase with land-based RAS production. The study highlights stochastic modeling provides significant “added-value” over single-point deterministic analysis and that developing an appreciation of the input variability is a key component in critically evaluating alternative production technologies.

KEYWORDS:

• Aquaculture
• decision making
• Monte Carlo simulation
• production technology
• risk
• stochastic modeling

Acknowledgments

Key in the success of the research was the active engagement of the international aquaculture community. The information and support that they provided was invaluable in ground-truthing the research findings and assessing the implications for the Tasmanian Atlantic salmon industry. The research was conducted by the lead author (ASK) as part of PhD studentship cotutelle between the University of Tasmania, Australia, and the University of St Andrews, United Kingdom.

Notes

In a Tasmanian salmon aquaculture context offshore operations were defined as having either high energy seas (a significant wave height typically greater than 3 m and current exceeding 0.5 m/s (James & Slaski, 2006); or being located in a remote site (beyond 25 nm of a landing point / port (Kapetsky, Aguilar-Manjarrez, & Jenness, 2013).

Total area under a probability density curve is 1, analogous to 100%. Reflecting every possible result falls within this range.

Probability that an event / value will not be exceeded by more than 5% of outputs.

Salt water systems incur 10–15% great RAS equipment costs, require more oxygenation capacity and larger biofilters (5%).

P5 value - There is a 95% chance that this value will be exceeded.

P95 value - There is a 5% chance that this value will be exceeded.

The required rate of return at which the NPV is equal to zero.

Conversion rate US$1.3: AU$ 1.0.

Honduran currency. Conversion rate around US$1 = 15 Lps.