Using real options model based on Monte-Carlo Least-Squares for economic appraisal of flexibility for electricity generation with VVER-1000 in developing countries

This paper aims to measure managerial flexibility value in deferring the investment of deployment. VVER-1000 nuclear power plants (NPPs) in developing countries. A methodology based on the Monte-Carlo simulation and adapting the backward dynamic least-squares programming is implemented to build a RealOptions-Valuation (ROV) framework. The influence of five uncertain market factors, including the risk-adjusted ratio; the expiration date of the option; the specific cost of capital investment; the volatility, and the drift rate of the market price of electricity, on the optimum investment timing and the exercise value of the deferral-option is studied. Results indicate that despite the preliminary analysis with the traditional DiscountedCash-Flow (DCF) investment appraisal tool, the ROV method provides attractive opportunities for decision-makers to analyze and capture the embedded possible real-options and upside potential risks managerial decisions by keeping the investment option alive and postponing investment for options maturity. Finally, performing a sensitivity analysis highlights that extending the validity period for investment in irreversible nuclear electricity generation with VVER-1000 in developing countries, which experience electricity-price volatility rate higher than 20% up to 11 years, could turn the investment project more economically attractive.