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Real Options versus Traditional Methods to assess Renewable Energy Projects

Title
Real Options versus Traditional Methods to assess Renewable Energy Projects
Type
Article in International Scientific Journal
Year
2014
Authors
Lúcia Santos
(Author)
Other
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Carla Mendes
(Author)
Other
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Paula Ferreira
(Author)
Other
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Journal
Title: Renewable EnergyImported from Authenticus Search for Journal Publications
Vol. 68
Pages: 588-594
ISSN: 0960-1481
Publisher: Elsevier
Scientific classification
FOS: Social sciences > Economics and Business
CORDIS: Social sciences > Economics
Other information
Authenticus ID: P-009-7PF
Abstract (EN): Several methods can be employed to evaluate investment in energy production. On one hand, traditional methods (Net Present Value (NPV) or Internal Rate of Return (IRR), for example) ignore certain project characteristics that may influence its evaluation, such as irreversibility, uncertainty and management flexibility. Nevertheless, the Real Option Approach (ROA) has an advantage over the application of traditional methods, since the prior uncertainties are taken into account. Thus, the main objective of this study is to apply ROA to a case-study (mini-hydro plant) through the use of the binomial tree developed by Cox, Ross and Rubinstein in 1979. This study concludes that the value of ROA is higher than the value of NPV because the investor can get better information and uncertainty is reduced when he has the option to defer the investment. In addition to providing a deep analysis on the major gaps in energy investment evaluation, this work contributes to a better understanding of the usefulness of ROA. (C) 2014 Elsevier Ltd. All rights reserved.
Language: English
Type (Professor's evaluation): Scientific
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