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Integrating carbon market uncertainties into a sustainable manufacturing investment decision: a Bayesian NPV approach

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  • Dileep Dhavale
  • Joseph Sarkis

Abstract

Net present value (NPV) is a widely used technique in capital budgeting. In this paper, we develop a Bayesian NPV framework using a Gibbs sampler. This approach allows decision-makers to integrate their knowledge, past experience, and uncertain and volatile cash flows from carbon emissions credits into decisions dealing with energy efficient, sustainable manufacturing equipment. The results indicate NPV is highly dependent on the nature of volatility and uncertainty of the cash flows. Without inclusion of this information through the Bayesian framework results, NPV becomes overstated, and thus it may provide biased guidance for the investment. The results developed in this paper further show that the frequency of very high and low cash flows and to a lesser degree their variability adversely impacts NPV. The results may also explain reasons for the economic phenomenon known as the energy efficiency gap.

Suggested Citation

  • Dileep Dhavale & Joseph Sarkis, 2015. "Integrating carbon market uncertainties into a sustainable manufacturing investment decision: a Bayesian NPV approach," International Journal of Production Research, Taylor & Francis Journals, vol. 53(23), pages 7104-7117, December.
    • Handle: RePEc:taf:tprsxx:v:53:y:2015:i:23:p:7104-7117
    DOI: 10.1080/00207543.2015.1018450
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    Cited by:

    1. Song, Yazhi & Li, Yin & Liu, Tiansen, 2023. "Carbon asset remolding and potential benefit measurement of machinery products in the light of lean production and low-carbon investment," Technological Forecasting and Social Change, Elsevier, vol. 186(PB).
    2. Saberi, Sara & Cruz, Jose M. & Sarkis, Joseph & Nagurney, Anna, 2018. "A competitive multiperiod supply chain network model with freight carriers and green technology investment option," European Journal of Operational Research, Elsevier, vol. 266(3), pages 934-949.

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