New federal legislation proposes to reduce greenhouse gas (GHG) emissions associated with biofuel production. To comply, existing corn ethanol plants will have to invest in new more carbon efficient production technology such as dry fractionation. However, this will be challenging for the industry given the present financial environment of surplus production, recent profit declines, numerous bankruptcies, and lender imposed covenants. This study examines a dry-mill ethanol firm's ability to invest in dry fractionation technology in the face of declining profitability and stringent lender cash flow repayment
constraints. Firm level risk aversion also is considered when determining a firm's willingness to invest in dry fractionation technology. A Monte Carlo simulation model is constructed to estimate firm profits, cash flows, and changes in equity following new investment in fractionation to determine an optimal investment strategy. The addition of a lender-imposed sweep, whereby a percentage of free cash flow is used to pay off extra debt in high profit years, reduces the firm's ability to build equity and increases bankruptcy risk under investment. However, the sweep increases long-run equity because total financing
costs are reduced with accelerated debt repayment. This thesis shows that while ethanol firm profits are uncertain, the lender's imposition of a sweep combined with increased profit from dry fractionation technology help the firm increase long-run financial resiliency.
| Identifer | oai:union.ndltd.org:ndsu.edu/oai:library.ndsu.edu:10365/29634 |
| Date | January 2009 |
| Creators | Fewell, Jason Edward |
| Publisher | North Dakota State University |
| Source Sets | North Dakota State University |
| Detected Language | English |
| Type | text/thesis |
| Format | application/pdf |
| Rights | NDSU policy 190.6.2, https://www.ndsu.edu/fileadmin/policy/190.pdf |
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