Publicação
Application of the real options theory to investment appraisal : the case of a photovoltaic investment
| Resumo: | Wrong investment decisions today can lead to situations in the future that will be unsustainable and lead eventually to the bankruptcy of enterprises. Therefore, good financial management combined with good capital investment decisionmaking are critical to the survival and long-term success of the firms. Traditionally, the discounted cash flow (DCF) methods (e.g. NPV – Net Present Value and IRR – Internal Rate of Return) have been worldwide used to evaluate project investments. However, given that today investments are characterized by high risks and uncertainty, DCF methodologies might be inadequate to deal with these issues. Some authors argue that only the techniques that can appropriately address the problem of uncertainty should be applied. In this paper, the major differences between the traditional methods and Real Options Theory (ROT) were analysed, in the context of an investment in the energy sector. Energy shortage, global warming, and climate change led to an increase in the use of alternative sources of energy, with renewable energy sources (RES) playing a fundamental role in this new energetic paradigm. However, the investment costs often constitute a major barrier to their spread use. Moreover, the overall benefits of renewable energy technologies are often not well understood and consequently they are often evaluated to be not as cost effective as traditional technologies. The way investors evaluate their investments call now for the use of more sophisticated evaluation techniques. Real Options approach can deal with these issues and, as so, began to be considered and applied for the energy sector decision aid. A large set of applications in almost all fields of energy decision making, from electricity generation, technologies appraisal and to policy evaluation is available in the literature. However the use of this technique in the field of RES is still limited and worth to be analysed. This paper addresses this issue. A review of the current state of the art in the application of Real Options approach to investments in non-renewable energy sources and RES is presented, giving perspectives for further research in this field. Also, an application of the ROT to a photovoltaic investment with the study of three different cases is presented, providing some interest conclusions about the major differences in evaluating this technology under ROT and the traditional project evaluation techniques. |
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| Autores principais: | Fernandes, Bartolomeu |
| Assunto: | Project evaluation traditional techniques Real options theory Renewable energy sources Energy sector Learning curves Técnicas tradicionais de avaliação de projectos Opções reais Energias renováveis Sector energético Curvas de aprendizagem |
| Ano: | 2011 |
| País: | Portugal |
| Tipo de documento: | dissertação de mestrado |
| Tipo de acesso: | acesso aberto |
| Instituição associada: | Universidade do Minho |
| Idioma: | inglês |
| Origem: | RepositóriUM - Universidade do Minho |
| Resumo: | Wrong investment decisions today can lead to situations in the future that will be unsustainable and lead eventually to the bankruptcy of enterprises. Therefore, good financial management combined with good capital investment decisionmaking are critical to the survival and long-term success of the firms. Traditionally, the discounted cash flow (DCF) methods (e.g. NPV – Net Present Value and IRR – Internal Rate of Return) have been worldwide used to evaluate project investments. However, given that today investments are characterized by high risks and uncertainty, DCF methodologies might be inadequate to deal with these issues. Some authors argue that only the techniques that can appropriately address the problem of uncertainty should be applied. In this paper, the major differences between the traditional methods and Real Options Theory (ROT) were analysed, in the context of an investment in the energy sector. Energy shortage, global warming, and climate change led to an increase in the use of alternative sources of energy, with renewable energy sources (RES) playing a fundamental role in this new energetic paradigm. However, the investment costs often constitute a major barrier to their spread use. Moreover, the overall benefits of renewable energy technologies are often not well understood and consequently they are often evaluated to be not as cost effective as traditional technologies. The way investors evaluate their investments call now for the use of more sophisticated evaluation techniques. Real Options approach can deal with these issues and, as so, began to be considered and applied for the energy sector decision aid. A large set of applications in almost all fields of energy decision making, from electricity generation, technologies appraisal and to policy evaluation is available in the literature. However the use of this technique in the field of RES is still limited and worth to be analysed. This paper addresses this issue. A review of the current state of the art in the application of Real Options approach to investments in non-renewable energy sources and RES is presented, giving perspectives for further research in this field. Also, an application of the ROT to a photovoltaic investment with the study of three different cases is presented, providing some interest conclusions about the major differences in evaluating this technology under ROT and the traditional project evaluation techniques. |
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