Real option's model to evaluate infrastructure flexibility: an application to photovoltaic technology

A mathematical model is provided for choosing a strategic investment in the photovoltaic industry that allows management to handle the uncertainty of the demand that cannot otherwise be dealt with by using the Net Present Value (NPV) as a tool to support decisions.

Abstract

The high level of uncertainty characterising the future market demand in many industrial sectors makes it necessary to use strategic investment evaluation models that foresee the possibility of determining and managing uncertainty in order to be able to fully take the potentials for creating the value associated with it. By using the approach of real options in this work, a mathematical model is provided for choosing a strategic investment in the photovoltaic industry; this model allows management to handle the uncertainty of the demand that cannot otherwise be dealt with by using the Net Present Value (NPV) as a tool to support decisions. Moreover, it will be shown how this evaluation model is able to reduce the risk of a strategic investment, if compared to the NPV, and point out the hidden value drivers of a managerial decision.