Investment analysis under uncertainty: a case study of investment in fish farming technology

Abstract

The Norwegian Aquaculture industry is facing great environmental problems, where the Norwegian Government have limited the production potential in the industry until these challenges can be resolved. New technology and innovations are central for the industry to grow and for the suppliers to meet the high demand for fresh Atlantic salmon. However, for new technologies to be successful, the investments need to be profitable and more lucrative than the assets used by the industry today. This thesis is written on behalf of Roxel Aqua, a possible new supplier in the aquaculture industry. With the “Brilliant™” fish pen, the company is seeking to change the industry trend of constant production volumes and stagnant growth. By investing in a submersible fish pen, incidents of sea lice can be limited, as the pen can avoid the higher temperatures and occurrences of lice found at the sea surface. “Brilliant™” is also constructed to be more robust and have other innovative components than fish pens in use today, that can benefit and profit the industry. A fundamental valuation, more specifically; a net present value approach, is applied as the appropriate model to value and compare “Brilliant™” to a conventional open fish pen. Roxel Aqua is facing an investment decision of which fish pen would be the most profitable alternative when investing in an offshore salmon farming facility. The forecasted cash flows in the valuation model is based on a detailed strategic analysis of the Norwegian aquaculture industry. Because investing in “Brilliant™” includes new and untried technology, and therefore results in high uncertainty of estimated variables, simulations of uncertain factors and sensitivity analyzes are included in the results. The outcome of the fundamental valuation indicates that “Brilliant™” will be a profitable investment, where the net present value model results in a value of 57.95 NOK/kg, compared to a present value of 22.32 NOK/kg for a conventional pen. The analyzes imply that the innovative fish pen may be a solution to the environmental problems in the aquaculture industry, and that it is a profitable alternative to today’s technology.