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A Real Option Perspective to Value the Multi-Stage Construction of Rainwater Harvesting Systems Reusing Septic Tank

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Abstract

Recently, rainwater harvesting systems have received increased attention due to their capability for adapting to water scarcity and climate change. However, a key obstacle to the implementation of rainwater harvesting systems is that they are often not financially feasible given difficulty in determining optimal system size. A key premise of previous studies was that all rainwater harvesting systems are constructed in a single construction event even though it is possible to construct a system in multiple stages. This assumption limits managerial flexibility in the construction of rainwater harvesting systems, which is particularly valuable in scenarios where it is difficult to forecast future rainfall patterns. Therefore, we propose a multi-stage system expansion strategy for the implementation of rainwater harvesting systems using decommissioned septic tanks under scenarios of uncertainty in rainfall from a real option perspective as a means to improve the financial feasibility of implementing rainwater harvesting systems. We tested this strategy by evaluating a proposed rainwater harvesting system for a midsize apartment complex in Jeonju, South Korea. The multi-stage expansion strategy generated an option value of 9,896 USD. This study will help to improve the financial feasibility of rainwater harvesting systems by adding the value of managerial flexibility through a sequential expansion of RWH systems as new information becomes available.

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Notes

  1. All costs were estimated by (Jeonju Water Development Board 2011) and were expressed in nominal US dollars unless otherwise stated. Values were converted from Korean Won using a 1 to 1,100 U.S. Dollar to Korean Won exchange rate. A 5.43 % of annual increase in cost of construction was applied to those estimates.

  2. $$ {\displaystyle \sum_{n=1}^{27}\frac{5,521.3\times 1.88\times {\left(1+0.0509\right)}^n}{{\left(1+0.0514\right)}^n}} $$
  3. $$ 1.26\times {\left(1+0.00509\right)}^{2021-2013} $$
  4. $$ \frac{278,420}{54,060+104,190}-1 $$

  5. 5,170-76,130 + 2,340

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Authors and Affiliations

  1. Department of Civil Engineering, Andong National University, 1375 Gyeongdong-ro, Andong-si, Gyeongsangbuk-do, 760-749, Republic of Korea

    Byungil Kim

  2. Department of Civil and Environmental Engineering, University of Michigan, 2350 Hayward St., Room 1316 G.G. Brown Building, Ann Arbor, MI, 48109, USA

    Kyle Anderson

  3. Department of Civil and Environmental Engineering, University of Michigan, 2350 Hayward St., Suite 2340 G.G. Brown Building, Ann Arbor, MI, 48109, USA

    SangHyun Lee

  4. School of Civil and Environmental Engineering, Yonsei University, 134 Shinchon-dong, Seodaemun-gu, Seoul, 120-749, Republic of Korea

    Hyoungkwan Kim

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  1. Byungil Kim
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  2. Kyle Anderson
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  3. SangHyun Lee
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  4. Hyoungkwan Kim
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Correspondence to Hyoungkwan Kim.

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Kim, B., Anderson, K., Lee, S. et al. A Real Option Perspective to Value the Multi-Stage Construction of Rainwater Harvesting Systems Reusing Septic Tank. Water Resour Manage 28, 2279–2291 (2014). https://doi.org/10.1007/s11269-014-0613-3

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  • DOI: https://doi.org/10.1007/s11269-014-0613-3

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