Modified-Decoupled Net Present Value: The Intersection of Valuation and Time scaling of Risk in Energy Sector
Although the practical importance of investment analysis in long-term energy investments is well understood, choosing the proper method has always been a dilemma. In this regard, classic evaluation methods, with a history of almost a century, are mostly favored, but using them in the valuation of lo...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
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Iranian Association for Energy Economics
2017-12-01
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| Series: | Environmental Energy and Economic Research |
| Subjects: | |
| Online Access: | http://www.eeer.ir/article_63363_5356f23782dcbe65919f96ee7bc0a1f1.pdf |
| Summary: | Although the practical importance of investment analysis in long-term energy investments is well understood, choosing the proper method has always been a dilemma. In this regard, classic evaluation methods, with a history of almost a century, are mostly favored, but using them in the valuation of long-lasting energy projects has particular shortcomings, nevertheless. The drawbacks mainly stem from two structural problems: a) reflecting risk in rate of return instead of cash flow thus summing up risk and time value of money in a single parameter, b) generalizing the predefined rate of return to all project life time regardless of changing nature of risk. To overcome such drawbacks, a new easy-to-implement method termed Modified-Decoupled Net Present Value (M-DNPV) is proposed that intercepts coupling of risk and time value of money by deducting the risky portion of expected cash flows. To cover the dynamic nature of risk and as a buffer against uncertainty, it is suggested to attribute measured risks to investment lifespan using an "uncertainty coefficient”. Finally, the ability of the new method is shown through a complicated energy investment: an Iranian Petroleum Contract (IPC). |
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| ISSN: | 2538-4988 2676-4997 |