The economic evaluation of investments in the energy sector: A model for the optimization of the scenario analyses

Abstract

The well-known evaluation indices do not allow to take into account the interaction between current investment alternatives and future decisions. The real options theory provides answers to the limits that the evaluators discovered in the traditional techniques of capital budgeting and allows to give a value to managerial flexibility, i.e. the ability of management to review its decisions on the basis of changes in the economic context. Implementing the traditional cash-flow analysis with the tool of real options, the study defines a logical-operational model capable of verifying the financial viability of investments in the energy sector. The model is applied to the economic study of a project to produce energy from renewable sources, specifically the construction of a new wind farm. The different operational phases of the model used for the optimization of the scenario analyses, return the value of the positive potential that can result from management flexibility and innovation. © 2013 Springer-Verlag Berlin Heidelberg.