Real Option Approach for the Evaluation of Investment Projects. The Case of a Multi-Fuel Power Station

The purpose of this paper is to show the potential benefits of applying an approach based on real options to assess investment projects in an uncertain and flexible environment. Particularly, this paper focuses on the evaluation of the flexibility given by a multi-fuel power station. This project (more expensive than a single-fuel one) is characterized by a higher managerial flexibility, because it is able to burn two or more different fuels (switching option). To value this option, a quantitative model based on the Monte Carlo technique was developed. This method is able to consider several uncertainty sources and, therefore, overcome the limits of the traditional techniques used by the Real Option theory