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Valuation of a Power Plant with the Real Options Approach

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Author Info

  • Alexandre Caporal

    (Abengoa Brasil)

  • Luiz Eduardo Teixeira Brandão

    (PUC-Rio)

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    Abstract

    Since the late 1990s, the Brazilian electric power industry has been undergoing significant structural changes, the main objective being to increase competition and attract private investment. Due to this, the National Electric Energy Agency has offered a large number of investment opportunities through auctions of the right to build and operate power plants (mostly hydroelectric) and transmission lines, including small hydroelectric plants.In this article we propose a valuation model for a power generation plant under uncertainty and with the flexibility to choose the optimal power purchase agreement using the real options approach, and then apply this model to the case of a small hydroelectric plant. The results indicate that the flexible project has a value significantly greater than that obtained through traditional discounted cash flow methods.

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    File URL: http://www.bbronline.com.br/public/edicoes/5_2/artigos/lhivhol@ff2122010102223.pdf
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    Bibliographic Info

    Article provided by Fucape Business School in its journal Brazilian Business Review.

    Volume (Year): 5 (2008)
    Issue (Month): 2 (May)
    Pages: 103-120

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    Handle: RePEc:bbz:fcpbbr:v:5:y:2008:i:2:p:103-120

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    Postal: Fucape Business School Brazilian Business Review Av. Fernando Ferrari, 1358, Boa Vista CEP 29075-505 Vitória-ES
    Phone: +55 27 4009-4423
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    Web page: http://www.bbronline.com.br/
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    Related research

    Keywords: finance; real options; capital budgeting; managerial flexibility; decision analysis.;

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    Cited by:
    1. E. Brandão, Luiz & Dyer, James S. & Hahn, Warren J., 2012. "Volatility estimation for stochastic project value models," European Journal of Operational Research, Elsevier, Elsevier, vol. 220(3), pages 642-648.

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