Influence of stochastic capital budgeting and real options valuation method on strategic investment decision : investment appraisal of synthetic firm producing algae based fuels in Sweden
Abstract: Algae based fuels may offer society a plenty of valuable benefits. Those include economical, environmental, and social benefits representing sustainability. Investors may have a wealth maximising option to diversify their portfolio hence reducing risks. Besides tax income and reduced unemployment rate, government gets a facility to reach environmental goals and to obtain energy security. When investor and government are satisfied, the other groups of society in a whole enjoy sustainability amenities.This paper considers an investment appraisal of technology producing algae based fuels. This technology has been technically and economically approved on the pilot project but in the less developed country. However, neither this technology nor analogs are present in Sweden. Therefore, authors evaluate it in the conditions of developed market of Sweden. The economical and financial evaluation of synthetic firms comprises classical Net Present Value approach, Stochastic Capital Budgeting and Real Option valuation. The set of these methods was chosen for testing the project on robustness in the condition with uncertainties and flexibilities. This is for the purpose to assist investment managers in the case when net present value appraisal is not enough for objective decision "to invest now or wait".
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